Dairy Crest's problem is that the price of raw milk in the UK varies with the pound-euro rate. Uncertainty surrounds the DTI's forthcoming report on competition in the UK milk industry. Declining raw milk prices led to a 2 per cent reduction in turnover to pounds 774m last year; the food services division, which contains the liquid milk activities, saw revenues fall 6 per cent to pounds 294m. Hefty investment - an advertising spend of pounds 12m - in value-added areas is diluting the group's exposure to commodity milk sales.
The group plans to spend more on marketing to lift its share of the UK's pounds 430m mature cheddar market with its branded mature cheddars. However, the cheese market grew by only 2 per cent last year. Marketing spend does not guarantee market share. Analysts expect pre-tax profits of around pounds 49.5m this year and earnings of 31p per share, putting the shares, at 294.5p, on a p/e of 10. Given the uncertainties, that's about right