Commenting on Dairy Crest’s trading update for the first six months ending September 30, Shore’s Darren Shirley and Clive Black said the group would need “a good second half to make up the balance so that management’s assertion that: ‘our profit expectations for the full year ending 31 March 2013 remain unchanged'.”
But that included property profits and is before a material increase in guidance for cash restructuring costs within the dairies division, they added.
Shirley and Black noted: “Management was frustrated in its attempts to re-coup lower commodity realisations from the market due to effective farmer protests that influenced the whole market.”
While management reported that had a ‘small adverse effect on profits in the period’, Shore estimated the cost to be about £1M.
Shirley and Black said: “Dairy Crest had taken decisive actions in closing the Aintree creamery, the planned closure of the Fenstanton facility in October, consolidating home delivery milk rounds (closing 23 depots in doing so), reducing central overheads and seeking higher milk prices.”
Management expects higher returns from commodity markets and better pricing, leading it to pay its farmer suppliers a higher price, increasing to 28.25p for October and 29.0p in November, they added.
But the cost of the restructuring was reflected in renewed guidance for restructuring, which is now expected to be £21M within the dairy division - all cash. This will be spread evenly between the Aintree, Fenstanton and the depots.
“Pre-restructuring and including property profits, we expect dairy to be a little above break even,” said the analysts. “However, Shore Capital’s continuing measure, which treats cash restructuring as one-off but not exceptional, will see a considerable loss (in H1 and FY [first half and financial year]) and a downgrade to forecasts”
Shore welcomed the disposal of St Hubert because it would “bolster its balance sheet and permits rating expansion”. The analysts added: “Quite how management allocates the €430M (£344M) of proceeds is a key point of interest with debt repayment, pension funding and ongoing acquisition the balancing variables.”
Shore downgraded its recommendation from ‘buy’ to ‘hold’.
The trading update confirmed that the firm's profit expectations for the full year ending March 31 2013 remained unchanged.
The firm’s four key UK brands (Cathedral City, Country Life, Clover and Frijj) continued to perform strongly in the first half, it said. That was partly due to a television advertising campaign.
Mark Allen, chief executive, said: “We are pleased with our first half performance despite the significant pressures on our business. Although we expect these to continue into the second half our first half performance together with our plans for the second half means that our profit expectations for the full year remain unchanged.
“At the same time we have continued to move the business forward and the proceeds from the sale of St Hubert leave us much stronger financially.”
To read more about Dairy Crest’s plans to close its Shropshire Creamery, click here .