Tempus: Northern Foods

Northern Foods has some tales to tell about the inconsistencies of the nation’s eating habits. Yesterday it said that demand for low-fat milk is still growing, but so is demand for rich cream cakes.

The company believes it has to address itself to the market for healthy foods and to that end it is stepping up production of low-fat milk from between 14 and 15 percent of total production to the national average of 18 percent. It points out, however, that only 10 to 15 percent of the food market is health-conscious.

Tastes are changing with greater rapidity than in the past. Last year, Northern Foods suffered from a slump in demand for pies and traditional sausages. It responded by developing a low-fat sausage, something that sounds more continental than British. Flexibility is now the key word.

The concern for health is but one of the driving forces behind the company’s recent disposals and acquisitions. During the year it sold North Country Brewers and consolidated its dairy interests with the acquisition of the Express Dairy business in the North of England and a similar Unigate business in Liverpool. In addition, it bought Bowyers (Wiltshire), a pie manufacturer, and since the year-end it has acquired LO Jeffs, a vegetable and salad company.

This reshuffle, involving deals worth pounds 180 million over 18 months, had little effect on the results for the year to March 31, when the company made pounds 66.1 million before tax, up from pounds 55.4 million. But this year the acquisitions should be beneficial, with Express and Bowyers expected to contribute pounds 5 million before tax. Two problem American companies, DAK Foods and Southern Belle, have been sold since the year-end which should boost profits this year.

The company is keen to replace its American businesses but it looks as if any acquisitions may have to be for paper as the ratio of net debt to shareholders’ funds is 41.5 percent, even after taking account of the post-balance sheet events.

Last year’s American problems depressed the share rating so that at 292p the shares are trading on less than 13 times prospective earnings, assuming profits of pounds 77 million this year. That multiple is roughly in line with the sector, whereas Northern Foods has traditionally traded at a premium.

If investors are not impressed by the customer list, which is headed by Marks and Spencer in Britain and McDonald’s in America, they might be attracted by the company’s realistic approach to diet. The shares look good value.