Donegal Creameries warns of lower profits

Shares in Donegal Creameries fell by 7.5 per cent yesterday as the company warned that profits for last year would be "substantially" below expectations.

Difficult trading conditions in both the dairy sector and its potato operations, allied to lower-than-expected income from asset sales, were the main reasons behind the profit warning.

Shares in the company fell by 16 per cent to €3.90 following the announcement as analysts sharply cut their forecasts for the company. But the stock later rebounded to close 35 cents, or 7.5 per cent, lower at €4.30 as the property-based nature of the company lent support to the share price.

Goodbody analyst Mr Liam Igoe said he was cutting his pre-tax profit forecast for 2004 by half, to around €2 million, while he was also reducing his 2005 forecast by nearly one-third to €4 million.

Meanwhile, company broker NCB has knocked 65 per cent off its 2004 earnings estimate to 15.8 cent and is also forecasting pre-tax profits of €2 million, followed by €4 million in 2005.

However, the broker said it did not expect the profit warning to impact the group's progressive dividend policy given its low level of debt, which stands at less than €10 million.

Donegal Creameries, where Mr Ian Ireland recently succeeded Mr John Keon as chief executive, said the difficult trading conditions experienced in the dairy sector in the first half continued in the second half of the year. The company pointed to high milk procurement costs relative to market returns, particularly in Northern Ireland where competition for milk has forced prices upwards.

Its potato operations, which are heavily concentrated in the fourth quarter, have also experienced tough trading conditions. The company blamed this on two factors: a significant rise in freight costs arising from the increase in oil prices and strong yields in the potato harvest in Europe, which depressed selling prices.

Donegal Creameries also said the group's income from asset sales would be substantially below market expectations. Although the company has agreed a number of substantial asset sales of sites on its Grianan lands between Letterkenny and Derry, these are subject to planning permission, which is taking longer to obtain than previously expected. "In these circumstances, the directors have decided not to include income from such sales at this stage," the company said.

Despite the sharp reduction in analysts' forecasts, the share price derived some comfort from the general perception of the company as "a property play". NCB noted the company's reported net asset value in September was €4.19 per share at book value.