Investment Column: Dalgety brings home the bacon

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The Independent Online
Dalgety has been a corporate disaster story. A ragbag of disparate businesses, it has stumbled along from one crisis to another over the last few years.

But yesterday it stunned the City by actually announcing some good news. Its new management have done the sensible thing and sold off almost everything in sight. The disposal of the pet food business for what can only be described as a very fancy price and the promise to give shareholders pounds 650m from its pounds 1.2bn sales proceeds is a far cry from last summer, when the group looked on its last legs after two profit warnings in quick succession. No wonder the shares leapt 49.5p to 343p yesterday.

Dalgety's pet food business has been a dog's dinner for years. Desperate for an acquisition, it paid way over the odds for Quaker's pet food business three years ago. However, the pounds 715m sale price is more than it could have dreamed of for a division which is making an operating profit of just pounds 30m a year.

So how do you value what is left of the group? The break-up rendered yesterday's results for the six months to December, which showed a fall in pre-tax profits to pounds 34.8m (pounds 43m), virtually meaningless.

Analysts believe that operating profits from the pig breeding business, which is now Dalgety's prize asset, should rise to around pounds 25m this year, and pounds 30m next. Given that Dalgety is a world leader in this field and its rivals are trading at around 25 times earnings, the division probably deserves a premium rating. Applying a cautious multiple of 17 times earnings, the business is worth perhaps 120p-125p a share.

After the disposal, the group will hand back 224p a share to investors, and have pounds 70m in the bank, equivalent to another 24p. Adding all that up gives a value of around 365p.

The shares should trade at a small discount for the fact that shareholders will not get all their cash for three or four months at least. Even so, there looks scope for some upside in the share price and, if Dalgety can extract itself from its dire agricultural feeds, business then it will begin to look good value.