This branded dairy foods company is seeking to make the most of its under-exploited milk distribution business with a new internet ordering service. Paul Hill explains why this stock offers good value for the cautious investor:
Dairy Crest (DCG), tipped as a BUY by The Independent
Dairy Crest is the UK's largest branded dairy foods company and generated revenues and underlying earnings per share of £1.38bn and 48.7p respectively for the year ending March 2007. It has number-one market positions in butter and spreads (20% share), with Clover, Country Life and Utterly Butterly; branded cheddar cheese, with Cathedral City (32% share); and fromage frais with Petit Filous. Outside the UK it also owns St Hubert, the second-largest spreads brand (34% share) in France behind Unilever.
Its brands account for around 75% of turnover; the rest comes from supplying supermarkets' own-brands. Although the latter is lower margin, the own-label business is important because it contributes to the recovery of factory overheads. But the longer-term goal is to continue investing in its leading products, and so capitalise on the trend for fresher, healthier and more nutritious foods.
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Dairy Crest is also seeking to get the most out of its under-exploited milk distribution business. After its purchase of Express Dairies last August from Arla Foods for £33m, it is now the largest doorstep milkman, with about 1.6 million customers and a 50% market share. In fact, its milk floats pass around 90% of all UK homes. With such a huge untapped opportunity, Dairy Crest has just launched a new internet ordering service at its Surbiton depot.
The new "Milk & More" service allows households to order online any time up to 10pm the day before their milk is delivered, and offers a choice of 150 items, such as fruit juice, organic bread and locally grown produce. Chief executive Mark Allen says that "we want to take the milkman into the 21st century". The majority of its customers are between 55 and 64 years of age, affluent and live in the suburbs. However, it is thought that there are growing numbers of 25 to 45-year-olds with children who would also use the service. The plan is to roll the concept out to three more depots in the coming months and then expand nationally across 170 depots if the trial is successful.
Sounds goods but what are the risks for investors? Let's not forget that this is a cut-throat industry and the company experiences relentless pressure from aggressive competitors, rising energy costs and volatile milk prices. Additionally, there is significant brand risk, particularly in the event of product recalls. For instance, Dairy Crest was forced to withdraw two million tubs of Clover from shops in May due to fears that the product had been contaminated by mould. On this occasion, the insurance footed much of the £5m bill excluding a £1m excess and luckily the impact was short-lived, with sales quickly returning to normal levels.
At last week's trading update the company was upbeat, with performance strong during the first three months and full-year expectations left unchanged. The shares jumped around 5% on the bullish news, but the stock still trades on a skinny 13 times 2007 forecast earnings per share of 55.5p. Net debt as at the end of March stood at £451m, with interest payments covered a comfortable five times. With a stable of top-notch brands, together with a healthy 3.1% dividend yield, I believe Dairy Crest offers good value for the cautious investor.
Recommendation: long-term BUY at 727.5p
Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments
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