Dairy Crest sells dairies

It's perhaps no surprise that the UK dairy industry is consolidating. The abolition of EU milk quotas is just around the corner, so more than ever companies need scale and efficiency to compete in global markets. However, the announcement still came as a shock - albeit a welcome one. This will be game-changing for Dairy Crest, which has struggled to squeeze profits out of its dairies division for some time. The business reported a first-half loss of £4.4m in the half, despite a small uptick in sales to £467m and income from selling off freehold property.

The sale will help Dairy Crest clean up its balance sheet with debt repayments. Cash flow should also improve sharply, as both the cheese and spreads divisions are highly cash-generative and well-invested. Crucially, Dairy Crest is retaining £20m in property assets, all of which will be sold to generate further income, and it is also set to receive tax refunds of £15m, according to Charles Hall at Peel Hunt.

Dairy Crest will in future have much less exposure to fluctuating commodity markets and can focus on developing - and further investing in - its high-tech whey business. This new venture in conjunction with Fonterra will see Dairy Crest manufacture demineralised whey powders and galacto-oligosaccharide for the fast-growing global infant formula market.

As for the half-year results, cheese sales grew 5 per cent to £131m, but profit fell 4 per cent to £16.8m. Spreads revenue dipped 4 per cent to £81.9m, but profit rose nearly 80 per cent to £12.7m as input costs fell. Overall, group pre-tax profit, excluding £16.2m of exceptional items, fell 3 per cent to £21.3m. Peel Hunt expects £63m for the full year, giving EPS of 37p - down from £65.3m and 40p last year.