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Investment: Brands reward Dairy Crest

DAIRY CREST, the former processing arm of the old Milk Marketing Board, has performed well since coming to the stock market two years ago. Floated at 155p, the shares now stand at 322p, up 7.5p yesterday.

Although this is off their spring peak, the shares have outperformed the market by around 30 per cent since flotation. The City likes the management and its strategy, and yesterday's half-year figures provided more evidence that John Houliston, the chief executive, is getting it right.

Pre-tax profits rose 11 per cent to pounds 20.7m and margins jumped from 5 to 5.8 per cent as Dairy Crest continues to shift its focus towards higher- margin, added-value ranges. These products, such as Cathedral City mature cheddar, Yoplait yoghurt and Clover spreads, now account for 40 per cent of sales and two-thirds of profits. The strategy is to edge those figures higher through organic expansion and acquisitions, such as February's pounds 66m takeover of Raine Dairy Products.

Dairy Crest is backing its top brands with increased advertising spends, which are paying dividends. The extra pounds 1m put behind Cathedral City cheddar lifted sales by 7 per cent in a market up just 2 per cent overall. Clover spread, which retails at a premium to rivals such as Utterly Butterly, benefited from a pounds 3m television campaign and its market share is growing.

On a broader front the dairy market is tough, but Dairy Crest's brands should give it some muscle against the might of the supermarkets.

The business may benefit from the inevitable consolidation of this sector but, even without a big shakeout, it looks well placed to make further progress.

On full-year forecasts of pounds 45.5m the shares trade on a forward multiple of 11. That is only in line with the sector, where a premium to the more commodity-based players such as Express Dairies and Robert Wiseman is justified. Good value.