THE better than expected results from Kerry Group took the market somewhat by surprise. Already brokers are preparing to revise upwards their full year profit forecasts for the group, which they now believe can put in a similarly strong performance in the second half of the year.

Analysts are due to meet the group today, after which most are expected to significantly upgrade previous forecasts of full year pretax profits of up to £50.5 million, compared to £43.2 million last year.

Despite facing rising raw materials prices in both US and European markets, the group has shown it has managed to maintain, and in some cases improve, its profit margins, particularly in its branded foods businesses.

And while the four month contribution of its newest acquisition, Ciprial, led to a slight reduction in margins in the ingredients division, Kerry says it is confident that these can be restored to around 9 per cent by the end of the year.

The figures also indicate that the BSE crisis has had little or no impact on its food sales in Britain. While sales of some of its branded products did suffer in the initial aftermath of the scare, Kerry says the situation improved fairly quickly.

Having withdrawn from the beef slaughtering business more than 12 months ago, the group said, it was able to rely on strong brands, particularly its Mattes son Walls meats product brands in Britain, to maintain its market share. It says British consumers are firmly sticking to traditional brands for meat and poultry products.

The strong profits increase shows that the group is now seeing the full benefit of its acquisitions, particularly on the ingredients side. However, debt levels remain very high, with net debt standing at £372 million, leaving the group with a debt to equity ratio of 108 per cent.

Kerry said yesterday that this would be reduced to £328 million by year end, which would bring its gearing to below 90 per cent. Underlying cash flow is very positive, according to Mr Joe Gill of Riada stockbrokers, which gives the group scope to steadily reduce its debt.

Even if this target is achieved, Kerry would have to go back to shareholders for funds to finance any further acquisitions. The group has indicated, however, that it will now concentrate on integrating recent acquisitions.

The group has also decided to hold on to DCA's Bakers Aid catering equipment subsidiary in the US which was put on the market earlier this year.

With signs that raw materials prices are beginning to ease, particularly in the US where cereal prices are at their highest levels in 15 years, Kerry is shaping up for yet another year of steady profit growth.