Dairy Crest - still not convinced

Dairy Crest Group (DCG.L): This is a stock that I have got consistently wrong, being bearish as the price has climbed steadily to today’s 567p, since the lows below 400p of last summer. The big positive news has been the proposed disposal of the troubled dairies division to Muller. This was referred to European regulators, but to the relief of Muller and Dairy Crest was sent back to the UK’s CMA in March 2015. The haggling with the CMA is now well underway, with an announcement due on 21^st August as to whether remedies have been agreed. This would then enable completion of the deal this year. Otherwise the CMA will only report in December meaning that the affair will rumble on into 2016.

In today’s trading update to 30^th June 2015, the year’s outlook is confirmed as unchanged. Cathedral City cheese continues to perform well, although sales progress was offset by slippage at Clover and Country Life, reflecting the runny state of the butter and spreads market. Cash generation is described as good, with weak milk prices releasing cash from working capital. Net debt should peak around the half-year mark (30^th September) as stock builds and capex continues. So that leaves FY2016 consensus eps of 38.8p looking solid, being a PE of 14.6x. A tickly little dividend advance from 21.7p to say 22p gives a yield of    3.9%. Further out FY2017 should see profits from the new infant formula milk ingredients project kick in, provided product testing and commissioning goes smoothly. I still fret that these valuations are getting ahead of themselves for a stock operating in such competitive markets. Any pushback from the CMA or on formula milk would be a stumble as would any increased price skirmishes in their cheese and spreads division. So I would still fight shy of getting involved with the stock, despite having been wrong so far. (Neil Cumming^, 16^th July 2015)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk  Twitter:  @DividendPower