Sales up, profits down at Taunton

INVESTMENT COLUMN

Investors who shunned Taunton Cider's less-than-successful stock market launch at 140p in 1992 clearly knew a thing or two. The market for cider has been bloody over the past couple of years.

Yesterday the UK's number-two producer revealed that underlying pre-tax profits had slipped from pounds 20.3m to pounds 19.8m in the year to 29 April, despite a 7 per cent rise in turnover. The problem for Britain's cider makers is that, although the market is growing at a faster rate than for any other alcoholic beverage, most of the increase is at the low-margin, economy end of the spectrum and in the take-home trade, where the big retailers call the shots.

Taunton has been aggressive in winning back market share, raising volumes 15 per cent last year against an overall market up 8 per cent. Sales to the five big supermarket groups are up 68 per cent, which has clearly put pressure on "opportunist" producers in the economy sector, such as Merrydown. But the extra sales have been won at the expense of operating margins.

The company is tackling the problem by cutting costs - the profit figures mentioned are before a pounds 4m exceptional charge expected to eventually produce annual savings of pounds 7.5m. It is also trying to push through price increases and has high hopes for new brands such as Diamond Ice and the joint venture to sell US Miller Draft lager in the UK.

But innovative brands such as Brody and Red Rock have not been conspicuously successful in the past, and Taunton is facing rising apple juice costs. Kleinwort Benson's forecast of profits rising to pounds 214m this year puts the shares, up 4p to 179p, on a forward multiple of 13. Unattractive.