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Dairy Crest Dairies restructuring efforts ‘overlooked’ – Panmure Gordon

By Mark Astley , 10-Dec-2012

The “scale and scope” Dairy Crest’s current efforts to restructure its lagging Dairies and Spreads businesses has been “overlooked”, according to stock brokerage Panmure Gordon.

According to a note from the firm, efforts by the UK dairy processor to return its Dairies business to growth have gone unnoticed. It now expects Dairy Crest’s Dairies business to return to 3% operating margins by fiscal year (FY) 2016.

“We believe the extent of the restructuring actions and resulting impact on Dairies profitability and the planned rationalisation of its Spreads manufacturing base are also under-appreciated by the current valuation,” said the note from Panmure Gordon's Damian McNeela and Graham Jones.

In recent months, Dairy Crest has taken a series of actions designed to reduce outstanding debts and improve efficiencies.

In July 2012, it sold its French spreads business, St Hubert, to Paris-based Montagu Private Equity for €430m. It has also announced the closure of its Crudgington, Shropshire plant, and the consolidation of its Spreads business into one site at Kirkby, Merseyside.

Good revenue growth

“In the past, we have argued that Dairy Crest’s higher operating costs and skew to the lower margin middle ground segment have placed its Dairies business at competitive disadvantage to its peers,” said the Panmure Gordon note.

“By the end of FY 2013 Dairy Crest will have invested around £75m in its Dairies business improving efficiencies and creating additional capacity allowing it to announce the closure of two dairies, a distribution centre and over twenty depots in FY 2013.”

The note adds that Dairy Crest is also making efforts to expand the reach of its core brands.

A UHT version of the firm’s popular Frijj milkshake brand in chocolate fudge brownie and strawberry flavours is currently on trial in parts of the UK.

Frijj, along with the company’s other three key brands – Cathedral City, Clover, and Country Life – achieved double digit growth in terms of volume and value in H1 FY 2013.

Panmure Gordon expects that Dairy Crest’s commitment to investing in these brands and new product development will lead to continued “good revenue growth.”

“We believe these actions combined, should return the business to 3% operating margins by FY 2016," the note added.

Strengthened balance sheet

The note added that this “strengthened balance sheet” should give Dairy Crest backing to pursue acquisitions.

“The strengthened balance sheet provides sufficient firepower to make a UK acquisition which could be significantly earnings enhancing,” it added.

“The strengthened balance sheet creates the opportunity for the company to make UK acquisitions which based on our scenario analysis could result in significant earnings accretion, we estimate up to 31% on £200m expenditure.”

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