Tight supermarket milk margins set Dairy Crest stock ‘in doldrums’, analysts

By Joe Whitworth

- Last updated on GMT

Related tags Dairy crest Milk

Tight supermarket milk margins set Dairy Crest stock ‘in doldrums’, analysts
Dairy Crest has issued a mixed trading update for the first nine months of its fiscal year, with persistent tight margins in its dairies business sector offset by strong performance across its branded portfolio.

In its interim trading statement for the nine months ending December 31 2011, the firm said it was driving efficiencies in its dairies business – and striving to grow added-value product sales – but that trading remained difficult, “where a combination of high milk purchase prices and lower cream realisations is adversely affecting profitability”.

Our focus remains on reducing the cost base as the best way to restore long-term profitability and our three year investment programme is on track​,” Dairy Crest said, adding that, nonetheless, Frijj, milk bag and milk&more (its online milk and grocery shopping service) posted growth.

But Clive Black and Darren Shirley, City analysts at stockbrokerage Shore Capital, said: “Dairy Crest’s stock has been ‘stuck in the doldrums’ since the rebasing of supermarket milk margins across the industry in late 2010”.

They added: “The mix of Dairy Crest profits for 2011 is slightly different to our expectations a year or so ago with the dairies performance remaining weak, off-set by a more robust than anticipated performance from the consumer brands division​.”

Challenging business environment

Overall, Dairy Crest’s group sales for the first nine months of the year increased 2% over last year on a like-for-like basis, although this figure excluded the disposal of its majority stake in Wexford Creamery.

The company said that Q3 sales its “five key brands”: Cathedral City, Country Life, St Hubert Omega 3, Clover and Frijj) were up 8% compared to last year, leading to value growth for the first nine months of the year of 6%.

French spreads business St Hubert increased its market share in the third quarter (Q3), while cost savings of £20m (€24m) for the full year were said to be on track.

Dairy Crest CEO, Mark Allen said the company had coped well in a challenging business environment and overall trading remains in line with expectations this year”

Takeover tattle

Black and Shirley touted Dairy Crest as the next UK dairy processor that could be subject to a takeover approach, in the wake of the announcement last month that German giant Mὓller UK had made an offer for Robert Wiseman Dairies.

Nothing had changed in the analysts' minds: “We cannot rule out that Dairy Crest's charms may also attract suitors in due course,"​ they said.

“We have written…for many years that the production (farming) element of the dairy industry and the European players in particular would see the UK as an attractive market, and so it has come to pass through Arla and Mὓller’s acquisitions.

Due to recent activity in the small to mid-capitalised elements of the UK consumer staples sector, Black and Shirley said (reaffirming a ‘hold’ rating on the firm’s stock) that Dairy Crest, “could not be dismissed as a potential target, not least because of a demonstrably strong brand portfolio.”

Dairy Crest will publish its full-year trading update on March 29 and preliminary results for the year ending March 31 on May 24.

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