Investment Column; Northern better by half

SHARES IN Northern Foods, the Fox's biscuits and Ski yoghurt group, have been performing strongly since it announced plans to demerge its Express Dairies business in January. The market has warmed to the simplification of the businesses, which gives investors a choice between a stable but lower-growth foods business in Northern or a more risky, but potentially higher growth stock in Express Dairies.

Given that both these companies published detailed figures in the demerger process, Northern came in slightly ahead of expectations with combined profits, including Express Dairies, of pounds 151.6m before exceptional items. Sales to its top five customers rose by five per cent, reflecting management's strategy of concentrating on the largest supermarkets.

While Unigate is now under pressure to do a deal Northern is confident it can grow earnings with its existing businesses. It has added two acquisitions including Cavaghan & Gray. Northern may also express an interest in parts of the Hillsdown empire.

Getting price increases through is a problem and Northern has resorted to various stunts such as decreasing the carton size of Ski yoghurts by more than the price cut to disguise the fact that the unit cost is higher. But Northern can still improve profits by growing volumes and keeping the lid on raw materials costs.

On full-year forecasts of pounds 102.5m Northern shares - down 5.5p to 230.5p yesterday - look a solid hold on a forward p/e ratio of 17.

Express Dairies is more of a bet on chief executive Neil Davidson pulling off a deal in the consolidating milk sector. Growth prospects look sluggish but the right acquisition or merger could transform earnings. The shares closed down 1.5p at 181.5p yesterday. On ABN Amro's forecast of pounds 60m for this year the stock does not look expensive on a forward rating of 13.

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