Dairy Crest worth a look: The Investment Column

It's second time lucky for Dairy Crest, the marketing arm of the old Milk Marketing Board, which really is coming to the market. The first attempt to sell the company, Britain's second- or third-largest dairy products group, had to be pulled in 1994 as a result of the turmoil in the milk market caused by the Government's deregulation proposals.

Dairy Crest's history as an adjunct of a quango should not put off potential investors. Since 1990, new management led by chief executive John Houliston has dragged the group into the commercial world. Employee numbers have been slashed from 12,500 to 3,400, working in 11 plants against 32 six years ago. Gearing of 132 per cent has turned into net cash of pounds 3.5m. Results since 1990 have been distorted by the exceptional cost of this radical reshaping of the business, which has seen the dumping of most of the doorstep delivery business and a halving of the amount of liquid milk handled.

Combined with the margin squeeze caused by higher milk costs in the aftermath of deregulation, profits of pounds 2.8m in 1994 represented a tenth of their level the year before. But there are signs Dairy Crest is emerging from the woods. Yesterday the group reported pre-tax profits up from pounds 22.1m to pounds 37.4m and said goodbye to exceptional charges that amounted to pounds 11.2m in 1994-95.

Consumer foods like dairy spreads, where the group has the leading brand in Clover, and upmarket cheese, where it is also the leader after last year's Mendip acquisition, is one of the businesses Dairy Crest believes holds the key to future growth. The market in the former is growing at up to 12 per cent a year, while mature cheddar sales grew 18 per cent last year. But even here, margins remain low at 5.3 per cent.

But its exposure to a commodity business is highlighted by the group's warning that profits are likely to ease this year as a result of the recent fall in skimmed milk and butter fat prices.

A forward multiple of around 10, somewhat below Northern Foods and Unigate, would seem reasonable in view of the risks. Assuming profits rise to around pounds 39m this year, the shares are worth buying up to a market capitalisation value of pounds 250m or so.