The Investment Column: Northern Foods

LIKE MUCH of the food manufacturing sector, Northern Foods has suffered a tough year. Shares in the manufacturer of Ski yogurt and Fox's biscuits lost more than half their value between July and April and have only recovered a little ground since then.

Express Dairies was demerged 18 months ago, but even after exiting the worrisome milk market, Northern has had plenty on its plate. It supplies ready-meals to troubled Marks & Spencer and food prices and volumes are falling. Full-year profits were flat at pounds 94.5m last year.

Sales to M&S, which accounts for 30 per cent of Northern's turnover, edged ahead by just 0.4 per cent. Sales to other supermarkets, which have leant on suppliers with price promotions, fared little better.

There are some positive signs. Current trading is in line with expectations and Northern recently pushed through a 5 per cent price hike in its fresh chilled dairy products, though it is unclear whether rivals will follow. The sector is meanwhile seeing a decline in discounting.

Also encouraging is the dynamic of Northern's capital expenditure, which has been twice the rate of depreciation over the past two years. This will be reigned back slightly this year and the investments should bear fruit in the next two years. The Cavaghan & Gray food business, bought in March 1998, is making progress although profit margins remain short of the group average.

Even so, Northern has yet to prove it can cut the mustard. Assuming profits of pounds 101m this year, the shares - up 3.5p to 140p yesterday - trade on an appropriately undemanding rating of 10. Hold.