Dairy Crest, the maker of Cathedral City cheese and Yoplait yoghurts, has announced a couple of moves to improve its debt situation.
First, its pension trustees have taken out a £150m annuity policy from Legal & General to insure part of its pension liabilities. The company has also made arrangements to reduce the effect of future currency movements on its net debt, by converting €200m back to sterling.
Its shares - which slumped last month after it warned profits would miss City forecasts - edged up 2p to 195p on today's news. But analysts were lukewarm on the moves. On the pensions deal, Investec said:
"Whilst there is no guarantee that the group will not be required to put more cash into the pension fund in future (its current extra payments cease after March 2009), this should help reduce the amount."
As for the foreign exchange switch, the broker commented:
"While not an ideal time to do it given rates, the group wanted to ensure that it was not overly exposed should sterling deteriorate further. The fall in sterling against the euro has already added to the group's debt which is now forecast to be £500m at year end versus our previous estimate of £475m.
"Today's moves do not change our forecasts. The PE ratio might look low, but the group is still trading [at] a premium to the average for the food sector. We adjust our target price to 200p (from 220p) as we do not see this premium being extended from here given the market's current view of highly geared businesses. We retain a hold recommendation."
Citigroup also has a hold rating, although today it has cut its price target from 330p to 190p. It said:
"Prior to [today's foreign exchange] actions, we estimate recent movements in the pound/euro exchange rate increased overall debt by around £30m.
"Covenants would only be breached if our estimated earnings for the second half of 2009 were to fall by another £11m (13%) and/or if sterling was to weaken (significantly) further against the euro.
"Risks have somewhat heightened and further negative developments in the consumer environment and/or foreign exchange markets could pose an issue. That said, we view Dairy Crest's debt realignment as sensible and, on balance, believe consensus 2009 operational estimates will remain intact."
Overall the market has been seeking direction so far, with the FTSE 100 moving within a 110 point range. At the moment the leading index is up just 4.26 points to 4313.34.
Traders are uncertain whether the Federal Reserve's move to slash US interest rates to 0.25% was a good one, or could leave it with too few options if the cut fails to stimulate the US economy.
Closer to home, the unemployment figures showed the claimant count jumped by 75,700 in November, while retail sales numbers were also - predictably - awful. The minutes of the Bank of England's rate setting meeting earlier this month revealed it had considered cutting rates by more than the eventual 100 basis point reduction.
James Knightley at ING Bank said:
"With unemployment now at 1.86m our forecast that unemployment will hit 3m in 2010 is looking on track. This will keep wage pressures benign and put further pressure on the Bank of England to follow the Federal Reserve's lead in adopting all possible measures to turn the UK economy around. Indeed, the minutes to the December rate decision which resulted in a 100 basis point cut showed that the MPC discussed cutting by more. However, they voted against a more aggressive move since it wasn't anticipated by the markets and could have negatively affected sterling and undermined confidence in the UK economy. This suggests that the Bank will continue cutting rates aggressively and we look for rates to hit 0.5% in March before more innovative stimulus options are potentially considered."
