The Dairy Crest Group

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Introduction

Dairy Crest Group plc is known as one of the largest United Kingdom-based dairy companies engaged in procurement, production and delivery liquid milk and associated products throughout the United Kingdom and Europe. The Group is in constant competition with other dairy suppliers such as Robert Wiseman Dairies and Arla. This analysis compares Dairy Crest Group with the potential competitor Robert Wiseman Dairies in sales, company valuations and financial performance and position, also includes the company description, profitability analysis, efficiency analysis, and financial strength analysis.

Company Description Dairy Crest Group PLC

Dairy Crest Group plc is a United Kingdom-based dairy company engaged in manufacturing and trading liquid milk and dairy products in the UK and Europe. In recent years, the Group made some business acquisitions and disposals to generate growth as well as building the leading positions in the market. In 2006, Dairy Crest acquired the Express Dairies Depot operations and Arla's Liverpool and Nottingham dairies. In 2008, the Company acquired certain assets from the East of England Co-operative Society. By these acquisitions Dairy Crest ensured the leading player of dairy business in the southern England, South Wales and East Anglia. The Group gets a significant development in the past five years. The charts and tables below show details about the company's five year development.

Competitor's Description Robert Wiseman Dairies PLC

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The Wiseman's principal activity is processing and distributing milk and associated products. With the money raised from the flotation, it has expanded its business with multiple retailers in recent years as well as acquisitions of Kennerty Farm Dairies (1995) and Milklink's fresh liquid milk business (2006). Now the company employs in excess of 4500 staff across 7 dairies and 15 distribution depots throughout the UK. Although still based in Scotland, sales in England now account for more than 66% of the total sales. Doorstep deliveries continue to decline resulting in an increase in sales in retailers. In 2008, a deal with a Spanish distributor to supply fresh milk in that country was agreed.

Sales Analysis

Dairy Crest Group plc reported sales of ?1647.6 million for the fiscal year ending March of 2009. This indicates an increase of 4.9% versus 2008, contributing to an increase in food segment from ?499.6 million to ?537.3 million and growth in dairy business from ?1070.1 million to ?1110.3 million. In general, there is a stable increasing trend in sales from 2004 to 2009.

While Dairy Crest Group and its comparable company Robert Wiseman Dairies experienced growth in sales in 2009, the 4.9% increase at Dairy Crest Group is not as significant as Robert Wiseman Dairies (which experienced growth of 17.4%). However, Dairy Crest Group currently has 8,122 employees, with sales of ?1647.6 million, this equates to sales of ?202.85 per employee. This is fairly close to Robert Wiseman Dairies, which had sales ?188.04 per employee.

Company Valuation Analysis

The Group's earnings per share are lower than that achieved during the last fiscal year of the company, which ended in March of 2008, when the company reported earnings of 51.7 per share. Earnings per share fell 13% in 2009 from 2008. However, the comparable company also experienced losses by 65.7% to 9.19 per share (2008 27.76 per share), which represents that Robert Wiseman Dairies suffers a larger loss than Dairy Crest Group because of the hard economic condition.

Dairy Crest Group paid dividends totaling 20.1 per share and dividend yield of 2.60%, which is the lowest number in the past four years. Although the Company reported losses of 25%, the company will return to profitability soon. The reduction of dividend is only proposed by management as a last resort other than indications of losing money. Both the P/E ratio and Payout ratio of Dairy Crest Group is lower than those of Robert Wiseman Dairies and the industry. From this point of view, Wiseman gains more market's confidence and expectations of growth in the future. The results are consistent with the performance of five-year average dividend yield and dividend yield growth rate of the five years.

Efficiency Analysis

There is an increase in inventory conversion period of Dairy Group from March 2008, when the company had only 37.09 days of sales in inventory. The 48.81 days in inventory is higher than that of Wiseman which had inventories 4.55 days sales at the end of 2009. This indicates that Robert Wiseman Dairies can quickly sell its inventory, while Dairy Crest Group cannot sell its inventory very well. On the other hand, the higher inventory ratio also suggests that the company may be keeping too little inventory, which could cause lost profits conversely.

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In general, if a company gives one month's credit then, it should collect its debts within 45 days. Debtor Collection periods of both companies are beyond 45 days (13.42 days and 14.81 days respectively). That means they can quickly convert the firm's outstanding debtors into cash.

Dairy's creditor deferral period is shorter which represents the company gets better credit terms from suppliers. Conversely, Wiseman's late and slow payments will take higher risks for losing suppliers or goodwill. This phenomenon is also represented in the cash conversion cycle.

Dairy Crest Group's CCC (cash conversion period) is acceptable, which is 48.95 days. It represents the less time of the capital of the company is tired up in the business, which is beneficial to the company's bottom line. While its competitor Wiseman has a negative CCC which is prominently resulting from collectingmoney fromcustomersprior topayingsuppliers, which indicates that Wiseman did not pay dairy suppliers until it received payment for selling the products.

Profitability Analysis

Firstly, Dairy Crest Group's 2009 gross profit margin is slightly lower than the company achieved in 2008 and 2007, when gross profit margin is equal to 27.92% and 30.6%. However, the company's 2009 gross profit margin of 27.06% was better than the comparable company which had gross profits 21.28% of sales in 2009.

Secondly, the company's operating profit was ?128.84 million, or 7.82% of sales. This EBITDA margin is worse than the company achieved in 2008, when the EBITDA margin was equal to 7.97% of sales. The Robert Wiseman Dairies had EBITDA margin that was less (7.07%) than that achieved by Dairy Crest Group. However, Wiseman had a more stable EBITDA margin than Dairy Group from 2005 to 2009.

Thirdly, there is an increase in ROSF, ROCE, and ROTA of Dairy Group from March 2008. The return on shareholders' fund is higher than that of Wiseman which is equal to 22.87% at the end of 2009. It is consistent with the return on total assets and return on capital employed, which represent Dairy has more profitable and efficient management shareholders' investment in assets and generate more profits than Wiseman. According to 5 years average ROE and ROTA, Dairy has a higher ratio in ROE while a lower ratio in ROTA than Wiseman. Moreover, both of the company's ROE and ROTA are higher than those of the industry.

Financial Strength Analysis

The financial health of Dairy Crest Group is better than that of Robert Wiseman Dairies because both liquidity ratio and current ratio of Dairy is higher than that of Wiseman. It indicates that Dairy has fewer problems with liquidity relatively. However, the liquidity of both companies is lower than that of industry. Moreover, the current ratios of Wiseman in the five years are always under one, suggesting the company wouldbeunable to pay offits short-term obligations with its most liquid assets.

Furthermore, there is a significant increasing trend of Dairy Group's gearing ratio in the last five years. Especially from March 2008, gearing ratio increases from 152.22% to 206.44%. The ratio is much higher than that of its compared company Wiseman, whose gearing is equal to 49.62% in 2009. The higher the gearing, the more vulnerable the company is to increasing interest rates. Most investors will refuse further finance when company's gearing exceeds 50 per cent. The higher gearing of Group make against generating investors fund in the future.

Conclusion

Despite the challenging economic environment in the last year, the Group has experienced the growth of 5% in sales versus last year in spite of the decrease in profit on operations. As a result, the gross profit margin falls by 3% last year, resulting in the decline in earnings per share (decrease by 13%) and dividend per share (decrease by 10.2%). However, the Group is in better financial health because fewer liquidity problems are exist in the company.

To short-term investors, it is advisable to invest in Dairy Group because both the growth profit margin and return on investment are higher than those of Robert Wiseman Dairies. These are associated with the larger scale and capital funds of the Dairy Group. However, the higher gearing ratio and lower payout ratio are negative signals for further investment in the future. To long-term investors, Robert Wiseman Dairies is recommended to invest in. But we must remind investors of lower liquidity ratios of Wiseman, which indicates the riskiness in the portfolio.

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Note that some of the financial ratios stated within this analysis may be distorted because of sales in financing, leasing, etc., which can distort certain ratios.