City analysts expect the benefits of Dairy Crest’s recently announced raw milk price cuts and the planned closure of two dairies to be felt in the second half of the fiscal year.
Panmure Gordon equity researcher, Damian McNeera has forecast that falling costs and the pending £344m sale of its French spreads business, St Hubert, will aid further recovery by Dairy Crest.
Satisfactory profitability
“The company has taken action to return the Dairies business to a satisfactory level of profitability and as such the group’s performance is in line with expectations,” said McNeela.
“This performance reflects the continuing support and investment in these brands but also benefits from a relatively weak comparative. Dairy Crest’s five key brands achieved 5% growth in Q1 2012 but this included a good performance from St Hubert.”
According to McNeera, Dairy Crest’s decision to close dairy plants in Aintree and Fenstanton, a reduction in the price paid for raw milk and a June increase in bulk cream prices has kept the it firmly on track to achieve targetted efficiency savings of £20m.
“Inputs costs such as fuel and plastics costs have also fallen recently, aiding the pressure on dairy margins,” added McNeera.
Investec Securities’ Nicola Mallard reiterated McNeera's forecast.
“Trading in Dairies should improve as the year progresses and the balance sheet will shortly be transformed by the proceeds from St Hubert. We await the next development for this business with interest,” said Mallard.
“The Dairy division has seen a challenging start to the year, so profits will be 2H weighted as the benefits of recently announced raw milk cuts take effect, alongside the plans to close two dairies which will be undertaken in the coming months.”
Decisive steps
In its AGM and Interim Management Statement, Dairy Crest repeated its efficiency savings commitment.
“As expected it has been a difficult quarter for our Dairies business, along with the rest of the sector. However, we have taken decisive steps to return it to a satisfactory level of profitability,” said the statement.
