Jamie Forbes-Wilson, manager of AXA Framlington Blue Chip Equity Income Fund (GB00B8HHY295), says markets have underestimated Dairy Crest's (DCG) ability to pay dividends.
"For years the stock market disliked Dairy Crest's capital-intensive, low-margin milk business so when Muller Wiseman made an offer to acquire it we saw the potential for a transformation," says Mr Forbes-Wilson. "Dairy Crest's key product is Cathedral City cheddar, sales of which have grown from £12m to £285m a year over the past 20 years, making it the 16th largest grocery brand in the UK. Innovation is a key element to growing sales further and we believe the brand has considerable scope for expansion.
"In making 47,000 tonnes of cheese each year the company also produces 25,000 tonnes of sweet whey. Dairy Crest has invested £65m in two projects enabling it to manufacture demineralised whey protein (DWP) and galacto-oligosaccharides (GOS).
"DWP is made by removing the minerals naturally found in sweet whey and is used as a major ingredient in infant formula milk. Euromonitor estimates that the global infant formula market will grow approximately 12 per cent a year over the next five years. For Dairy Crest the market is appealing as DWP achieves a 70 per cent premium to the selling price of sweet whey historically. For potential customers the full traceability of Dairy Crest production is highly attractive.
"GOS is a prebiotic used in a variety of food products for both infants and adults. Again, Dairy Crest will be able to produce the highest quality, fully traceable GOS product and sell it internationally. The potential exists to expand into new product markets which would add further strong growth to the opportunity.
"With a well-invested capital base, growing end markets, new products and a dividend yield of around 4 per cent, Dairy Crest will be a valuable addition to the fund."
