Shares in food producer Dairy Crest (DCG) slide 18.5p, or 3%, to 598p after warning milk and cream cost inflation has triggered a short-term working capital outflow.
The company behind the Cathedral City, Clover and Country Life grocery brands, says year-end net debt will be higher-than-expected as a result, although the share price reaction seems to discount numerous positives in today’s trading statement.
MILKING IT
Dairy Crest has encountered a strongly rising farm-gate milk price, up 8.28p per litre from 22.72p last June and stoking a sharp 38% increase in the price it pays to farmers. In tandem, ‘market prices for cream have remained high after more than doubling in the first half of the year,’ says Dairy Crest.
‘The cream price determines the input costs for our butter business. These movements inevitably result in a short-term working capital outflow and, as a result, we now expect year end net debt to be somewhat higher than 31 March 2016.’
While rising costs and gearing levels are unwelcome, CEO Mark Allen assures the full year outlook remains in line with management’s expectations. Shore Capital leaves his year-to-March 2017 forecasts unchanged, looking for growth in pre-tax profits and earnings to £61.5m (2016: £57.7m) and 35.8p (2016: 34.2p) respectively.
The broker also factors in an improved dividend of 22.5p (2016: 22.1p), although its net debt estimate does rise by a not insignificant £12m to £240.4m.
GROWTH INGREDIENTS
Moreover, Allen highlights good progress in the core branded groceries business. Key brands Clover, Frylight and Country Life all grew volumes and market share in the nine months to December, while cheese brand Cathedral City’s performance perked up in Q3 in a still deflationary category.
As Shares explained here in May, Dairy Crest also has a functional ingredients business with tasty growth potential. At its Davidstow factory, it produces demineralised whey powder (DMW) and galacto-oligosaccharide (GOS), both ingredients for the growing global infant formula market.
‘There have been significant improvements in the percentage level of demineralised whey hitting the important infant formula grade,’ says Allen today, adding ‘we remain confident that this will continue to rise and that we will hit our target of over 80% by 31 March 2017.'
Shore Capital sees ‘such confidence as a material positive to the Dairy Crest investment case’. The brokerage comments: ‘Whilst the DMW performance has been a little below our start of year expectations, we remain of the view that the global infant formula markets that underpin the DMW and GOS investments continue to look very attractive over the medium-to-long term.’
Before Christmas, Dairy Crest also announced an exciting research tie-up with DuPont’s Danisco Animal Nutrition arm to explore potential uses of GOS in poultry and swine, work which if successful, would broaden the market beyond infant formula.
