FRUIT and vegetable distributors Fyffes has surprised the market with a warning that half year profits may be lower than expected.

Addressing shareholders yesterday, Fyffes chairman, Mr Neil McCann, stated that while business had improved over the past couple of weeks, currency factors and lower prices across its product range were likely to drag half year profits down.

"Business has been flatter than expected in the early months of 1997 and half year trading may be slightly less than at that time last year," he told shareholders.

"Current trading has improved and while it is too early to predict the outcome for the full year, we are hopeful of better trading in the second half," he said.

His comments surprised the market, prompting analysts to revise their year end forecasts for the group.

Most had been predicting that pre tax profits would rise from £48.5 million to more than £51 million in 1997.

These forecasts are now being downgraded however, with analysts suggesting pre tax profits could be lower than last year, forecasting end of year results of between £47 million and just under £50 million in 1997.

The shares traded down in Dublin and London following the chairman's comments.

Fyffes closed at 100p yesterday, down 6p on the day, with the market expecting the shares to come under further pressure later this week.

After the meeting, Fyffes deputy chairman, Mr Carl McCann, stressed that the announcement was a cautionary note rather than a profits warning.

"What we're seeing at the moment is a flatter first half and it is possible that profits may be a bit behind last year," he said.

He said currency factors were affecting the company in a number of ways. First, the strength of the pound against key European currencies was reducing its earnings in these markets when translated back into the Irish currency.

A strong US dollar has also translated into higher costs for the group, which purchases its bananas in dollars.

Fyffes is also facing price deflation across the board with prices down on average by around 10 per cent, according to Mr McCann.

"But it's a six month issue and hopefully it will remain a six month issue" he added.

The weaker half year performance will, however, affect the full fiscal year, with the second six months traditionally the most important period for the group.

Over the past couple of years, though, the second half has proved difficult and analysts believe this pattern could be repeated again in the later part of 1997.

The market is awaiting a report from the World Trade Organisation due next month which is expected to be highly critical of the banana regime.

Some analysts suggest that it could trigger reforms within the banana industry, advocating greater liberalisation of prices.

The chairman, however, told shareholders that whatever the report contains, the group was unlikely to see any adverse reaction.

Last year, Fyffes reported a 15 per cent increase in pre tax profits to £48.5 million, in what proved to be a difficult year for the banana industry.

A first time contribution from Geest and a strong performance from the non banana fresh produce business boosted profits. The group is carrying considerable cash reserves, with a cash pile of up to £70 million.

Mr Carl McCann has hinted that it may use some of these funds to buy back some of its shares. It is also holding discussions with a number of parties in Europe on possible acquisition opportunities.

However, Mr McCann said that no imminent deals were likely.