Dairy Crest slumps on Jefferies downgrade

The bank said it was returning to the stock in light of last week’s first-half numbers, which showed profits ahead double digits. However, it noted that the stock’s valuation is demanding, with the shares up 16% since the summer trough.

“We continue to like the strategy and management, and get that DCG benefits near term from rising dairy prices. What we don't get is the heady valuation and aggressively pitched consensus, in the context of our growing wariness on cost pass-through by retailers. With the UK macro storm clouds gathering, we turn bearish.”

Jefferies said that on its preferred metric of embedded value to EBITDA, including pension deficits, Dairy Crest is trading at 12.2x, which is as 2% premium to Unilever and 20% to Danone.

“We get the earnings quality of Cathedral City and a degree of legitimate bid spec. But the underlying premium is high and we observe that c.40% of profits arise from an arguably lower-quality Spreads business,” it said.

Jefferies said that while the company has a good track record of inflation recovery, this is very much baked in to the share price.

At 0913 GMT, the shares were down 5% to 566.50p.