Unigate gives renewed warning on trading

UNIGATE, the food manufacturer, issued a renewed warning on trading conditions yesterday as it released the offer document for its improved pounds 274m bid for Terranova Foods, which was recommended last week.

Unigate said trading conditions in the UK food manufacturing industry "remain difficult", adding that there is renewed pressure on pig margins. The company also repeated its statement, first issued in November, that Unigate would see a "pause" in growth this year.

The downbeat statement pushed Unigate's shares 17p lower to 449p as analysts downgraded forecasts for the year to 31 March. Most say the so-called "pause" in Unigate's growth will now be rather longer than originally expected.

If Unigate had been offering shares for Terranova, the company would have been obliged to issue this information during the bid. But cash won the day and yesterday Unigate tried to sugar the pill of the trading warning by saying the cost savings from the Terranova deal should be higher than expected, at pounds 5m in the year to March 2001.

But the overall picture for Unigate shareholders is far from clear. The shares have underperformed the market by more than 40 per cent in the past year and there are few signs of a short-term recovery.

Pig prices are a major issue for Unigate, whose Malton pig processing business accounts for around 20 per cent of group profits. Pig prices were devastated last year by a combination of oversupply and disappearing demand from key markets such as Russia. Now UK farmers, which supply most of Unigate's meat requirements, have begun to restrict their output, forcing prices up by 15-20 per cent in April alone.

Unigate is considering buying more pigs from producers in France and elsewhere, where there is still a pig glut, if UK farmers do not adjust prices.

With Unigate's mainstream dairy and foods business being hit by increased promotional activity in the hard-pressed sector, Sir Ross Buckland and his team have plenty on their plate.

Further consolidation in the milk market would help, as would additional expansion into continental Europe, where Terranova has some good growth businesses.

On revised full-year profit forecasts of pounds 140m, the shares trade on a forward multiple of 10. This is hardly demanding but until there is better news on trading or another Terranova-type deal, the stock is unlikely to make much headway.

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