Investment Column: Cash pile is key factor at Unigate

Unigate has been a good investment over the past three years as shareholders have focused more on the steadily growing fresh foods side of the business and less on the slowly declining milk arm. Although the balance of those two has resulted in only gradually improving profits, the re-rating of the shares over the past three years has seen them double in value to yesterday's 600p, up 5p.

Profits for the six months to September were in line or slightly better than analysts' expectations. Pre-tax profits increased 11 per cent to pounds 67.4m thanks to higher underlying profits and more interest on Unigate's still burgeoning cash pile. Earnings per share of 21.3p were 10 per cent higher and the interim dividend rose 7 per cent to 7.5p.

Behind the headline figures lay good growth in the food operations - fresh foods and dairy - and a steady performance from the Wincanton logistics business which is recovering from last year's transport problems.

St Ivel's chilled products were the driving force, with the Utterly Butterly and Vitalite spreads giving Unigate an impressive 24 per cent share of that market and Shape yogurts posting a 25 per cent volume gain after a marketing push.

Dairy recorded an 11 per cent increase in profits, on modestly rising turnover, thanks to lower raw milk prices and cost reductions. The problems over the past four years since the Milk Marketing Board was replaced by the private monopoly Milk Marque now appear to be behind the company.

From an investment point of view, what matters is what Unigate plans to do with its pounds 170m cash pile. Sir Ross Buckland, chief executive, was pretty coy on that subject yesterday, although he did say a share buyback was less likely than further acquisitions. That is good news, because a return of cash to shareholders could only expect to enhance earnings per share by around 7 per cent, whereas a sensible acquisition ought to be able to add more in the medium term.

Even without further acquisitions, Unigate's shares still look reasonable value even after their recent run. With analysts forecasting an acceleration of profits growth to pounds 140m this year and pounds 150m next time, they trade on an undemanding prospective price/earnings multiple of around 13. That discount is probably an unfair reflection of what are now much higher quality earnings.