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Back to Corporate Watch Report
23 January 2003
Northern Foods under pressure
Tempus By Robert Cole
The Times
16 January 2003
SHARES in Northern Foods lost more ground than
any other FTSE 350 stock yesterday. A troubling trading statement,
pointing to slower Christmas sales and narrowing profit margins,
did some of the damage. However, it was a fear that Northern would
find its pips squeaked by forthcoming consolidation of the supermarket
sector that accounted for the larger part of the 22 per cent share
price decline.
Moreover, the barbs heading Northern’s way
as a result of the supermarket consolidation are smeared with a
venom that, according some observers, could force the company to
cut its dividend.
If Safeway is subsumed by any existing player,
or divided between several players, the remaining supermarket operators
will gain leverage over suppliers such as Northern. Each of the
Safeway suitors predicts that consumers will benefit from lower
prices if their bid is successful. Some savings will come as duplicated
overhead costs are eliminated, but it is hard to see the supermarkets
funding all the price cuts themselves. They will, surely, expect
suppliers to share the pain and they may expect them to shoulder
more than their fair share of the burden.
Northern is one of the leading suppliers to the
supermarket chains and has an enviable reputation for investing
in its production facilities with a view to proving its ability
to be a reliable and efficient supplier. The experience of the past
two Christmases, however, raises questions about the effectiveness
of its spending. In 2001 it suffered because it could not get enough
product into the shops at the required times. This Christmas just
gone, it overproduced — although it is fair to say that Northern
also had to cope with enhanced competition in its Fox’s biscuit
business from United Biscuits and Burtons, which, under newish ownership,
are enjoying resurgent fortunes.
The generous income on Northern shares has been
one of the key attractions. With yesterday’s fall in price,
the historic yield has risen to 6.6 per cent, and into territory
that suggests that the market expects a dividend cut to come. Northern
has debts of £300 million and gearing that Investec, the stockbroker,
forecasts will be about 74 per cent at the end of March. In addition,
last year’s total dividend of 8.2p was only 1.6 times covered
by underlying earnings per share. However, the interest bill is
about five times covered by operating profits, suggesting that the
company will be able to ride out the storm without cutting the divi.
Hold.
Robert Cole
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