The Investment Column: Northern weaned off milk round

Like its dairy industry counterpart Unigate, Northern Foods has endured a painful restructuring over the last two years as it has come to terms with the decline in doorstep milk deliveries.

It has reduced its bottling capacity by 40 per cent and cut 5,000 jobs, leaving recent profits figures scarred by the resulting charges.

The shares have responded accordingly, falling from 1993's 280p to a low of 166p at the end of last year. Then, just as the company looked like it was out of the woods, along came the BSE scare in March, knocking the shares back down again. Added to these woes has been the continued price pressure from the supermarkets to which Northern Foods supplies a wide range of ready-made meals and liquid milk. Northern's cream was left tasting extremely sour.

But, as with Unigate, which reported figures on Monday, the situation for Northern Foods is gradually improving. Profits for the year to March bounced back from pounds 16m to pounds 119.8m, though the 1995 figures were depressed by pounds 91m of restructuring costs. Stripping out the exceptionals, profits from continuing businesses improved by 4 per cent to pounds 124m. The market was encouraged by the chairman Chris Haskins' bullish comments on consumer spending, which gave optimism that this year will be better than expected.

In prepared foods, profit improved by 6.6 per cent to pounds 82.4m, though the BSE scare will knock pounds 4m-pounds 5m off the total in the current year. The best performers were Eden Vale and the cakes, desserts and puddings business. The hot summer dented sales of Fox's biscuits.

In milk, doorstep volumes fell by 12 cent, which was in line with expectations and better than Unigate's 16 per cent. Supermarket deliveries improved by 11 per cent, though this is a low-margin business.

Northern is hoping that the supermarkets will start easing prices, taking the pressure off the suppliers. But given the grocery retailers' willingness to use volume lines such as bread and milk as loss-leaders, this could be wishful thinking.

Northern is also unhappy about Milk Marque's monopoly position in the milk supply industry. Following the drop in the market price, it seems to be assuming that there will be a cut at the price review next month. If this reduction fails to materialise, Northern's margins will remain under pressure.

The other main concern is Northern's strategy to increase its exposure to the big supermarkets groups, which now account for 60 per cent of group sales in prepared foods. This when most other food companies are trying to reduce their exposure. BZW is forecasting profits of pounds 130m this year. With the shares up 3p to 194p, they trade on a forward rating of 12. Hold.