Acquisitions on the menu as profits flow at Unigate

The Investment Column

After last year's impressive rise, shares in Unigate have looked wobbly this year and lost 10 per cent of their value at the time of the BSE scare in March. But things are starting to look up.

The sale of the 29 per cent stake in Nutricia in December for a net gain of pounds 212m has transformed the company's balance sheet leaving net cash of pounds 170m. Since the year-end, the troublesome Black Eyed Pea chain of US restaurants have been sold, requiring a total provision of pounds 59.5m. The Taco Bueno chain will be off-loaded this year leaving Unigate concentrated on two main businesses, fresh foods and distribution.

With the funds likely to be used for an acquisition rather than a share buy-back, the market wasted no time trying to second-guess a possible target. Shares in Geest, shorn of its troublesome banana business, stormed 20p ahead. Dairy Crest, the foods group that is coming to the market valued at pounds 274m, would be an easily digestible bite. There is a hint that a European deal could also be on the cards as Unigate has named its recently acquired French business St Ivel Europe, even though it only includes the French division. The City would prefer a food deal, but an acquisition to bolster the Wincanton logistics business is also possible, with Tibbett & Britten a candidate.

Acquisition talk meant Unigate's results took something of a backseat. Profits jumped from pounds 58m to pounds 299m in the year to March though this was largely due to profits on disposals including the Nutricia stake and the Giltspur exhibitions business. At the operating level, profits rose 12.2 per cent to pounds 114m. As expected, profits in the dairies business fell from pounds 38m to pounds 35m. Door-step sales of milk fell 16 per cent during the year but the fall is slowing. Milk supply to the supermarkets remains under pressure as the grocers squeeze supplier margins. Chief executive Ross Buckland is still angry about Milk Marque's price rises and supports inquiries that could see the situation corrected.

European Foods had a good year boosted by the first full-year contribution from the French businesses. Malton, the UK's largest supplier of bacon, ham and pork, also performed well, though the benefit from the beef scare will be felt in the current year's profits. Wincanton Logistics, the distribution division, added new customers and has invested in new automated warehouse.

Analysts are sticking with a profits forecast of pounds 126m. With the shares up 8p to 417p, that puts Unigate' stock on a forward rating of just over 10. This is a discount to the sector which would make the shares look cheap if Mr Buckland pulls off a decent deal. With little down-side the shares are worth a look.

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