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Dairy Crest on rise after Sainsbury milk deal: City

By Mike Stones , 20-Feb-2013
Last updated on 20-Feb-2013 at 13:36 GMT

Winning Sainsbury’s liquid milk contract has put Dairy Crest on track to reach its dairies division target of 3% operating profit margin, according to City analyst Panmure Gordon.

Its analyst Damian McNeela said the 210M litre deal – which runs until 2017 – coupled with organisational changes would prove a welcome boost to the business in an increasingly competitive market.

“The retention of the Sainsbury’s business is a good result for Dairy Crest and removes a key risk to its plan to return the dairies business to an acceptable level of profitability,” said McNeela.

“However, as widely expected, the terms of the contract are not as favourable as before, reflecting the competitive environment within the dairies industry.”

Organisational changes

Organisational changes announced this week include the departure of the finance director Alastair Murray after 10 years in the role. Murray will be replaced by Tom Atherton who is currently the director of financial control.

Also Toby Brinsmead, md of the dairies business, will leave the business in May 2013. Mike Barrington will become responsible for managing the entire supply chain.

McNeela said: “We believe that the organisational changes make sense in the context of a simplified business.”

Panmure Gordon predicted the restructuring conducted over the past three years, combined with more favourable commodity markets, would enable the dairies division to lift earnings before interest, tax and amortisation from £8.5M in financial year 2013 to £16.7M in 2014 and to £23.8M in 2015.

The organisational changes were expected to yield cost savings of about £5M for the financial year 2014 but this had been included in the firm’s £20M annual cost savings guidance.

Panmure Gordon was confident Dairy Crest could achieve the forecast 2.8% operating margin by financial year 2015 and retained its ‘hold’ recommendation on Dairy Crest stock.

Investec Securities agreed that the renewal of the Sainsbury contract removed “an immediate challenge for its supermarket liquid milk business” and should help to stabilise the dairy business over the next few years.

‘More of a surprise’

Its analyst Nicola Mallard said: “The management reorganisation was more of a surprise, but highlights the continued focus on costs.”

Mallard added: “The reorganisation will provide some assistance in stripping out cost, removing duplicate functions by moving to one business unit from the current two. Slightly more surprising is the departure of finance director, Alastair Murray, who we feel has done a good job in in straightening out Dairy Crest’s finances over the years.”

Investec retained its ‘buy’ advice on the firm’s stock.

Shore Capital analysts Darren Shirley and Clive Black said the Sainsbury deal would be particularly welcome after market speculation about Arla’s intentions.

“That Dairy Crest is able to announce it has retained its contract to supply Sainsbury represents excellent news for the group, particularly given concerns by some in the market (not by us, it must be said) that Arla would seek to fill its new 1bn litre per annum milk facility, which is due to open in summer 2013, with volume wins at Dairy Crest’s expense,” they said.

Shore Capital retained its ‘hold’advice on Dairy Crest stock.

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