Resurgent Golden Vale to expand foods' arm

A resurgent Golden Vale is planning to substantially expand its consumer foods business and extend its current dairy-based operations into other markets in the food sector after reporting bumper results for 1997.

The results for last year were well ahead of forecasts, with pre-tax profits of £16.2 million and earnings per share of 8.03p. This means that Golden Vale is now almost back at the profit levels of 1995 before a succession of disasters sent figures stumbling in the following year.

And with net debt almost halved to £32 million - a gearing level of 30 per cent - the group is in a sound financial position to expand through acquisition. The first of these and the first time that Golden Vale will move outside its dairy-based business is expected to be the £15-£20 million acquisition of Rye Valley Foods, the Monaghan producer of prepared foods.

Golden Vale managing director, Mr Jim Murphy refused to comment on the speculation linking the group with the takeover of Rye Valley, but he said that acquisitions would need to have the capacity to generate sales of up to £200 million within two to three years. He added that Golden Vale aimed to lift sales of its consumer foods from the 54 per cent of total sales last year to around 75 per cent.

Golden Vale turnover rose from £561 million to £565 million last year due totally to a big increase in sales of consumer foods - cheese, spreads, liquid milk, cream liqueurs and UHT products - from £277 million to £306 million. In contrast, sales of butter and milk powders fell from £43 million to £39 million while sales in the agri-trading division slumped from £45 million to £40 million as farmers reduced their spending on farm inputs.

And at the operating level, the shift in dependence towards consumer foods is more apparent, with operating profits in the division more than doubling from £7.5 million to £15.4 million. Operating profits from butter and milk powders recovered from £2.7 million to £4 million although agri-trading profits collapsed from £1.9 million to just £500,000.

The highlight last year in consumer foods was the success of Golden Vale's Cheesestrings product, which analysts believe contributed £400,000 to profits against a target of breaking even. Overall, cheese sales increased 14 per cent to £141 million, although sales volumes were ahead by 4 per cent.

Mr Murphy said: "We are now a significant player in the cheese snacks market, but we want a bigger share with more products." After its success in Britain, Cheesestrings has now been launched on European markets.

In line with the rest of the industry, Golden Vale suffered from lower retail consumption of butter, but this was offset by increased sales of its range of spreads. Mr Murphy said that the group was keen to expand its presence in the retail milk market in both the Republic and Northern Ireland and denied recent reports that Golden Vale planned to off load its liquid milk operations at Bridgend in South Wales.

Milk volumes last year were down 2 per cent but the sterling exchange rate meant that sales (expressed in pounds) actually rose 5 per cent to more than £80 million.

There was a recovery in profits at the butter and spreads operations, but margins last year of 1.8 per cent are still seen as unacceptable by Golden Vale. Mr Murphy said that he would like to see margins pushed towards 3 per dent, mainly through generating more added value from the basic products and more cuts in costs.

He insisted that Golden Vale was not interested in acquiring more milk - it already has 15 per cent of the national pool - but would be interested in acquisitions of companies which would generate added value milk products such as skim milk powder.

The agri-trading division remains a serious problem, although it accounts for less than 8 per cent of sales. With profits plunging as a result of reduced purchasing by farmers, a severe rationalisation of Golden Vale's chain of farm stores seems likely. Mr Murphy would not comment, however, on the plans he had for the division, but warned that "significant action would be required".

Although the Golden Vale results were comfortably ahead of market forecasts, the share price stood still at its recent high of 115p. After the 40 per cent rise in the share price in the past three months, Golden Vale is now trading on a par with companies in its peer group such as Avonmore Waterford. Corporate activity in the form of acquisitions will probably be needed to drive the share ahead much further.

In the absence of acquisitions, analysts are still expecting substantial organic growth and Riada analyst, Mr Joe Gill, has increased his 1998 earnings forecast from 8p to 9p per share with profits this year of around £18 million. These forecasts are probably conservative.