Investment Column: Dividend makes Dairy Crest a buy

Whatman has gone far enough for now; IT is back in fashion, so consider Spring
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The Independent Online

Some of the bad smells emanating from Dairy Crest of late are not solely due to the maturing vats of its Cathedral City cheddar cheese.

Some of the bad smells emanating from Dairy Crest of late are not solely due to the maturing vats of its Cathedral City cheddar cheese.

In August it warned that losing a Tesco milk supply contract to rival Robert Wiseman Dairies would hit profits in 2005. Its share price curdled on the news, but the resulting uplift in the company's dividend yield has added back a bit of sweetness to the investment case.

The news from Dairy Crest's half-yearly trading update yesterday was better. Drummond Hall, chief executive, said that spreads (Clover, Utterly Butterly, St Ivel Gold and Country Life) had performed well, with St Ivel Gold and Country Life Spreadable performing particularly strongly.

For a consumer goods company it was reassuring to hear Mr Hall talk of increased investment in advertising for these key brands, which account for 40 per cent of operating profits.

In cheese, sales of both mature and mild cheddar have held up on the back of low industry stock levels, with Cathedral City still the UK's leading branded cheddar. Frubes and other such branded yoghurt products, owned by a joint venture with Yoplait, enjoyed good growth but own-brand versions are struggling and the company is shutting a factory at Enfield, north London.

The doorstep delivery business is in decline, but the company has managed to slow the rate by selling more fresh produce off the back of its milk floats and acquiring small delivery businesses to keep the annual rate of top line shrinkage to about 9 per cent.

The troublesome milk division is looking to replace the lost Tesco contract, and is reducing overheads to readjust as well. But analysts have lopped £15m off next year's pre-tax profit forecast, bringing it to £75m compared to £84m this year.

With a price-earnings ratio for this year of 6.5 times it is well below rival Arla on 9.5 times. but Dairy Crest's 6 per cent yield, which is covered 2.5 times, makes it stand out as good value. Buy for income.

Whatman has gone far enough for now

Whatman's expertise is in hi-tech filters, made from a variety of materials and used in a range of industries, from environmental testing, through food and drink manufacturing, to drug research. It is a company that lost its way after a string of acquisitions that it never properly integrated, but which has since been pulled back together by a new chairman and, now, a new executive team.

Textbook stuff: merge manufacturing sites, slim down the product range, go back to customers to find out what they want and to rebuild trust in the company. Whatman is nearly there, and interim results yesterday showed it pulling in 7 per cent extra sales and substantially widening profit margins.

We said the shares were worth a punt 18 months ago when they were 75.5p and the dividend yield was 6 per cent. Yesterday they closed at 205.5p, down 5.5pbecause of one minor hiccup in the restructuring (the company lost 45 days of sales of one product) and a slow summer in lab supplies.

The share price now reflects optimism for more efficiency improvements at the remaining manufacturing sites. It also reflects hopes for a new DNA purification system already used by police forces and which could soon find other uses. The dividend yield, despite a rise in the payout, is now barely 2 per cent. Hold.

IT is back in fashion, so consider Spring

The spring collections on show at London Fashion Week have nothing this year as showy as Spring Group's collection of financial figures, unveiled yesterday. This is as glamorous as it gets in the world of IT staffing.

Revenues at the company, which specialises in placing IT contractors, were up 40 per cent at the half-way point of the year. The number of contractors on Spring's books rose 16 per cent. And, at the bottom line, black is the new red. Profits were £1.6m, compared to a loss of £3.9m in the first half of 2003.

The designer of this recovery is Richard Barfield, chief executive since 2000, who has unpicked the legacy of two failed management teams before him and positioned the group ideally to benefit from a return of confidence in IT spending.

And so it is. Demand for IT contractors has grown as companies dust off projects that were mothballed after the dot.com bust. There has also been work as a result of corporate mergers and outsourcing plans, which all entail disruption to existing IT systems.

The recovery is being led by temporary contract work and Spring's business in permanent staffing is lagging behind. But it has made some progress in selling its higher margin services, such as that which takes over the management of a big company's entire IT staffing needs. Barclays, the high street bank, extended a contract with Spring in this area yesterday.

We last wrote on Spring in March 2003, at the depths of stock market despair, when we feared that the UK economy would weaken and nip Spring's recovery in the bud. We were too gloomy, and have missed out on a 136 per cent rise in the share price. The stock ought to stay in fashion as long as the UK economy stays upright on the catwalk. Buy.

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