Investment Column: Wiseman's milk won't go off even in recession

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The Independent Online

Robert Wiseman Dairies

Our view: hold for now

Share price: 331.8p (+4.1p)

The mood of investors towards Robert Wiseman Dairies soured markedly in September when it issued a nasty profits warning and pinned the blame on yet another price war between the supermarkets and in the independent grocery sector.

Yesterday, the milk producer, which counts Tesco, Sainsbury's and the Co-operative Group among its customers, reiterated that it faced a "period of intense competition" which will inevitably squeeze margins as it churned out a 2.7 per cent fall in pre-tax profits to £21m for the six months to 2 October.

The company, based in East Kilbride, also confirmed its September guidance that this competition would hit its second-half profits by £7m and, assuming no improvement in margins or volume gains, by about £16m in the financial year to March 2012. All of this leaves a taste like a bad pint of Wiseman's product on a hot day.

But despite this, the company, which supplies just under a third of Britain's milk, said it was committed to maintaining its existing volumes, suggesting that it is prepared to stand shoulder-to-shoulder with its rivals Dairy Crest and Arla on price.

This was demonstrated by Wiseman's turnover, which increased by 6.8 per cent to £452.8m over the half year, driven by sales volumes which were 8 per cent higher. In fact, Wiseman said it had agreed to supply Tesco with an additional 35 million litres of milk a year, which helped to move its shares up yesterday. So there is scope for volume gains to freshen performance.

Wiseman provided investors with some further cream by maintaining its interim dividend at 5.75p a share and cutting its net debt to £21.5m from £26.7m. To mitigate the impact of the price war on its margins, Wiseman is pushing ahead with a programme aimed at reducing costs and boosting the efficiency of the business.

Wiseman's shares trade on a rather modest multiple of 8.8 times 2011 forecast earnings, with the stock near a 12-month low after a recent battering. Life is not going to get much easier for the company anytime soon but with the shares so depressed we wouldn't be bailing out just yet. Whatever the general economic climate, people are unlikely to stop buying milk. So, on balance, there is a case for keeping hold of the shares for the moment.


Our view: hold

Share price: 1838p (+71p)

Investors in Lonmin must be pleased. The platinum producer's annual figures surpassed market hopes as prices and output recovered. Lonmin also met its annual sales target despite problems with a troublesome furnace, and reinstated its dividend, sending its shares higher on the day. Some analysts weren't convinced, however.

Panmure Gordon, for example, stuck to a bearish view, expressing its surprise at the dividend as net debt, at $357m (£222m), was higher than expected. Evolution was also wary of the stock, noting that 2011 was set to be a tough year as the problematic Number One furnace will be shut down during the first quarter.

Moreover, the broker pointed out that while costs had risen at a slower rate than South African inflation, Lonmin remained a high cost producer. We are inclined to plant our flag midway, agreeing that Lonmin still faces certain issues, but noting the prospect of further gains in platinum prices (although up 15 per cent this year to about $1,675 per ounce, they remain clear of the 2008 peak of $2,290) as the world economy continues its recovery from the recent slump.

That should help underpin Lonmin's performance and the share price, which, though ahead of its June low, remains below levels seen at the beginning of this year. This is no candidate for a sell, so keep holding.