Attractive income play
Dairy Crest is a quality, branded food business with strong management and attractive free cash generation. While the current environment remains challenging, the shares are attractively priced and offer a well-underpinned and highly appealing 6.5% dividend yield.
Final results
Yesterday’s final results for 2012 were resilient in the face of significant headwinds. Adjusted pre-tax profits were essentially flat at £87.4m (£87.6m), reflecting an improved contribution from the Foods business offset by lower profits from Dairies. However, the full-year dividend was raised by 3.6% to 20.4p – in our view, a strong signal of management’s future confidence.
The power of brands
Despite the obvious challenges facing the consumer environment, Dairy Crest has once again displayed the power of its core brands, with sales rising by 11%. While cost inflation and supermarket pricing pressure have presented challenges, the company has been successful in mitigating these through price rises and saw resilient volumes – testament to continued consumer loyalty and brand investment.
Dairy restructuring
The liquid milk business remains tough. It is highly commoditised and continues to suffer from supply overcapacity, particularly in the middle ground. While Dairy Crest saw a significant fall in Dairies’ profits to £10.2m (£27.1m), largely reflecting high raw milk costs and lower bulk cream realisations, an action plan is in place. The company is to consult on the closure of two dairies that should provide significant cost savings and help restore operating margins to 3% (currently 1%) in due course.
Attractive valuation and a growing dividend
While the market place is likely to remain challenging, the company should be capable of generating sufficient free cash to fund a well-underpinned dividend yield of 6.5% that looks highly appealing with the shares trading on a P/E of just 6.6x.
To Read the Entire Report Please Click on the pdf File Below.