Dairy Crest raises £70m for cheese expansion as butter weighs on profits

Dairy Crest is raising almost £70m to increase production of its market-leading cheddar amid strong worldwide demand for cheese, after annual profits growth was held back due to rising cost inflation in the butters market.

An accelerated placing of new shares equivalent to 9.8% of the FTSE 250 group's current share capital at a price of 495p, a 7.7% discount to the last closing price, kicked off on Wednesday morning. Directors expect around a 6% dilution to earnings "in the short term" but said the dividend policy will remain unchanged.

The placing was announced alongside results for the year to 31 March that included a dividend maintained at 16.3p as sales jumped 10% to £456.8m but adjusted profit before tax and earnings per share only rose 3% to £62.3m and 36.7p respectively.

Anticipating that capacity constraints from its existing cheese factory in Davidstow, Cornwall, could prevent the group from taking advantage of "a number of attractive opportunities for further growth" of its Cathedral City brand, management want to expand production capacity from 54,000 tonnes per annum today to up to 77,000 tonnes at an expected cost of £85m over the next four to five years.

Chief executive Mark Allen waxed lyrical about Cathedral City, which grew its UK cheddar market share to around 20%, "and we see plenty of room for further growth for this industry-leading brand" and "good momentum in revenue growth going into the new financial year".

Not only is the UK cheese market growing at 2% a year, with 65% of the market being private label, Allen et al see growth opportunities in snacking and convenience ranges and want to take advantage of demand for high-quality, mature cheddar in Europe, the US, China and the Far East.

Although cheese profits grew 17% as sales and profit margins expanded, group product profit margin decreased to 15.7% from 16.4%, as margins from the butters, spreads & oil segment shrank to 12.5% from 16.9% reflecting the competitive butters and spreads market and significantly higher butter input costs. On the upside, margins increased markedly in the second half as cost pressures abated.

Overall, Allen felt it was a year of progress, with much of the groundwork completed to set up the company to sell the demineralised whey and galacto-oligosaccharides produced as a by-product from its other activities. Several infant formula customers have been secured for both demineralised whey and GOS and progress was reported in selling GOS to the adult and animal nutrition markets under trade mark brands, Promovita and Nutrabiotic

"We expect sales of demineralised whey at infant formula grade to accelerate further over the coming year. We have already established ourselves as a leading supplier for organic GOS and we are also making good progress in developing a market for GOS beyond infant formula, having carried out research which has shown the meaningful benefits of using this product in animal feed," Allen added.

"We will continue to invest in our brands, supply chain and infrastructure to ensure that we are well positioned to capitalise on future growth opportunities."