The Investment column: Unigate falls victim to Russia and the pig glut

UNIGATE, the food and dairy company that bought chilled food producer Terranova in April, conjures up images of milk floats in quiet suburban streets. But it is not a parochial business, and it has fallen victim to the international financial crisis.

Russia's economic turmoil has destroyed the once lucrative market for European pork, leaving the continent awash with unslaughtered pigs and pig prices in tatters. Malton, Unigate's pig processing operation, is struggling to compete. It will take more than the pounds 419m in acquisitions since the end of March to see Unigate recover.

Unigate's fresh foods division - Malton and St Ivel - represents the majority of group sales and it saw operating profits fall by 20 per cent to pounds 60m last year. Malton's problems follow the last government's adoption of animal welfare standards ahead of other EU nations, making it among Europe's most stringent. These costs cannot be passed on to consumers because ham and bacon are basic commodities, and retailers' allegiances are to the lowest-cost vendor.

To compound Malton's problems, one of its plants burned down last year. Meanwhile, St Ivel is facing increased competition in the spreads market and upped its marketing spend, slashing margins.

The outlook is unpredictable. Yesterday there was fresh economic data to suggest that Russian markets are still vulnerable. The US has slapped a ban on Malton's rib exports, worth pounds 10m annually, and Terranova has sales worth around pounds 15m vulnerable to a dioxin ban. However, the Belgian dioxins food scare could trigger culls in Europe's pig herds, which could accelerate an upswing in the pig price.

The rest of Unigate's business is a mixed bag. The logistics and distribution arm, Wincanton, delivered strong growth with new contracts from the Co- Op and Iceland. The traditional dairy business delivered increased profits on falling sales. But the recently acquired chilled food businesses, such as Terranova and Marie, have margins of just 4 per cent. Unigate's task is to cut costs here and use its continental presence to sell its existing products.

The shares fell 8p to 435p yesterday. DKB forecasts pre-tax profits of about pounds 150m and earnings of 46.5p a share in 2000, putting the shares on a lowly forward p/e of nine. The shares are out of favour partly because of the unpopularity of Unigate's attempt to buy Hillsdown last year. But on fundamentals the rating seems fair for a largely commodity business in tough markets which has yet to prove it can make a success of recent acquisitions.