The Investment Column: Dalgety dogged by food scares

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The Independent Online
It's been a pig of a year for pet food giant Dalgety. Up until March it had to wrestle with soaring cereal and soya prices, which have been rising faster than at any time since the 1970s. Then the BSE crisis struck. Exports of petfoods from the UK into Continental Europe were banned, ingredient sales were hit, while stock containing meat and bone meal had to be written off.

All told BSE cost Dalgety pounds 15m - pounds 10m less than indicated three months ago - but Dalgety is confident no further "mad cow" provisions will be needed now that manufacturing has been rescheduled and products reformulated.

Another pounds 5m was lost as a result of a product contamination scare in Holland involving a dry petfood that killed 330 cats and, to cap it all, local objections forced Dalgety's subsidiary, the Pig Improvement Company, to drop plans to build Britain's biggest pig farm in the Scottish Highlands.

As all of this was while the pounds 465m acquisition of Quaker's European petfood business was being bedded down it is easy to see why Dalgety's chief executive Richard Clothier described the year to June as "character forming to say the least".

Excluding one-off items, pre-tax profits fell by a fifth to pounds 102m, including pounds 52.7m (pounds 33.4m) of Quaker reorganisation costs. Adding back the pounds 64.4m gained on the disposal of the Golden Wonder bagged snacks business restricted the pre-tax setback to 4 per cent, to pounds 89.6m. The uncovered dividend was held at 22p.

Mr Clothier remains convinced that buying Quaker's European petfood business was the right strategic move. Maybe, but apart from Felix, the old Spillers petfood business is struggling against stiff competition from Mars and Nestle.

Worse, the Quaker deal has boosted petfood profits by less than pounds 10m to pounds 36.1m - a poor return on the pounds 550m, including pounds 84m of restructuring costs, shareholders forked out.

Profits of pounds 120m in 1997 would put the shares, at 329p, on a p/e of 12, yielding 8.3 per cent. Avoid.