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Credit Suisse drops target for Dairy Crest following share placing
Following the publication of Dairy Crest's full-year results and its 10% share placing to allow further investment in the company's cheese capacity, analysts at Credit Suisse saw fit to lower their 2019 earning per share estimates on the Country Life owner by 4%.
Higher capital outlays and the 6% pro-forma EPS dilution resulting from that cash call also resulted in a downwardly revised target price of 550p, versus 600p beforehand.
Reiterating its 'neutral' recommendation on the group's shares, Credit Suisse said that Dairy Crest focus on higher growth format alternatives - such as slices, grating and snacking - in the UK cheese segment should help its Cathedral City brand outperform the market and noted that, in order to support this growth, as well as to target international markets, the company's decision to place shares seemed "sensible against a relatively levered balance sheet".
That was particulary true given rising government bond yields.
Assuming 4% growth at Cathedral City, versus a flat UK cheddar market over the next five years, Credit Suisse said Dairy Crest could up its market share to roughly 24%, from 20% at present, and consume "roughly half of the capacity expansion" with the rest going to international markets.
Nonetheless, even at full capacity, the payback period on the approximately £85m invested would be between four and five years, the broker said.
"We expect a 7% increase in FY19E operating profits to £77m driven by pricing in spreads/butter, whilst cheddar profits will be impacted by higher input costs feeding through. Helped by the share placing, the company should end the year with net debt at 2.1x EBITDA, we estimate," Credit Suisse said.