Say cheese. Perhaps less catchily, say infant formula milk; even say galacto-oligosaccharides (or Gos for short). Say all of those things and you’ll have gone some way towards describing what Dairy Crest is. Despite the ever increasing popularity of its Cathedral City cheddar brand, it is hardly a one-trick pony. As well as making cheeses, butters and spreads, Dairy Crest uses the whey generated as a byproduct of its processes to make an ingredient used in formula milk, sold across the world but particularly strong in Asia.
Through another lactose-derived product that it developed as a by-product of its cheese-making and also used in formula milk, it has come up with a prebiotic drink for consumers that helps the gut to produce health-promoting bacteria. It is poised next year to launch a “shot” under the Promovita brand that is thought to have lots of sales potential and is reminiscent of successful daily health drinks such as Yakult and Actimel.
Yet despite all this apparent potential, the stock market appears wary and the shares have been in decline for the past two years. Why is the City so unimpressed?
Dairy Crest was founded in 1981 as the milk processing arm of the Milk Marketing Board, set up by the government to ensure sales for Britain’s farmers. It launched Clover in 1983 and started producing Cathedral City after buying the brand from Mendip Foods in 1995.
Its biggest strategic turning point came four years ago when it withdrew from the milk market by selling its dairies to the UK and Ireland arm of Germany’s Müller Group, offloading in one fell swoop a division that accounted for two thirds of its sales. It now gets its milk from about 350 farmers, most of them local to its cheese factory in Davidstow, Cornwall.
Dairy Crest makes Cathedral City and Davidstow cheddars, including low-fat versions; its butters, spreads and oils include Country Life, Utterly Butterly, Clover and, for the health conscious, Frylight cooking oil spray.
And business seems to be going well. Cathedral City’s sales were even stronger during the first half than they were in the first six months of last year and revenues from Clover are also continuing to rise. As a result, group pre-tax profits between April and the end of September are going to come in ahead of the unadjusted £151.4 million that Dairy Crest made last time.
They will be held back by Frylight, though: sales and revenues fell in the first half as households ate less fried food because of the hot weather or used their barbecues instead.
Dairy Crest’s net debt, an uncomfortable £281.4 million this time last year, is going to be noticeably lower, in part thanks to its £70 million capital raising earlier this year to raise funds to expand production at Davidstow.
Debts have been a worry for Dairy Crest’s shareholders, along with the rising price of milk, which is up by close to 15 per cent this year. This helps in part to explain the pressure on the share price: up 8p to 466¾p yesterday but down almost 20 per cent since the beginning of the year. In truth, shareholders are probably also frustrated at the length of time the company has taken getting its Gos products to market.
It must be frustrating for Dairy Crest, which is a perfectly respectable operator, albeit not a high-growth one, but there feels to be little in the near term that might propel the shares higher.
Trading at just four and a bit times earnings and with a yield of 4.85 per cent, they are ridiculously cheap. Reluctantly, though, and if only because growth is modest rather than stellar and the stubborn downward pressure on the shares, they are to be avoided.
ADVICE Avoid
WHY The shares have been disappointing and it’s hard to see that changing soon
MJ Gleeson
Maybe it’s because the company is run by a seasoned housebuilder with nearly 50 years’ experience, but MJ Gleeson just seems to spot opportunities that others miss. As a result, it boasts a level profitability — a gross margin of 32.7 per cent — that should be the envy of the industry.
MJ Gleeson was founded in 1903 in Sheffield by Michael Joseph Gleeson, an Irish bricklayer who inherited the business. It has been run since 2012 by Jolyon Harrison. He joined in 2009 as it reeled from the impact of the financial crisis, forced to sell off huge swathes of its business due to its debts.
Since then Mr Harrison has created an enviable profits engine. MJ Gleeson specialises in building low-cost homes in the north of England that sell for an average of £125,000. It sold 1,225 last year as part of a plan to double output to 2,000 houses a year by 2022.
A key strength is its ability to find brownfield sites no one else wants, pick them up cheap then build affordable quality homes that people want to live in. Gleeson Homes accounts for two thirds of profits.
Not only that but it also trades land in southern England, through Gleeson Strategic Land, which takes out cheap options to buy sites it believes will win planning approval then makes a healthy return when it arrives by letting a bigger builder develop them. This represents the remaining one third of profits.
Pre-tax profits rose by 12.1 per cent to £37 million on a 23 per cent increase in revenue to £196.7 million over the year to the end of June. This prompted it to lift the dividend by a third to 32p. In an indicator of the rise in profitable building to come, MJ Gleeson added 1,264 plots to its pipeline in the north during the year.
There is an attractive resilience about MJ Gleeson. About 60 per cent of its sales come through the government’s Help to Buy scheme. Unlike other builders likely to be exposed when the scheme ends, MJ Gleeson plans to reintroduce an arrangement where it helps out buyers in exchange for part ownership of a home. Trading at 13 times earnings and with a yield of 4.4 per cent, the shares, up 26p to 722p yesterday, are a solid long-term buy.
ADVICE Buy
WHY Efficient, resilient, attractive business with good long-term growth potential
