Bottom Line: Unigate's scope for growth limited

UNIGATE was perhaps a little naughty to claim a 25 per cent rise in operating profits from its continuing businesses. Strip out the benefit of acquisitions and an extra week's trading and the underlying result was only about 4 per cent ahead - a fair performance given the pressures on food manufacturers.

But without further corporate activity, even similar growth in the near term will be hard to generate. A series of dairy acquisitions - three more joined the fold last year - has helped Unigate to rationalise capacity and so push margins up to 8.9 per cent from 7.4 per cent in 1992.

The company still believes the return from supermarket business is too low. But as margins at the more efficient Northern Foods are 9.1 per cent the scope for further improvement looks limited, even before the imminent milk pricing reforms.

The same is true of distribution where, leaving aside the contribution from Glass Glover, the 2 per cent growth in operating profits looks sluggish and the group warns that it has slowed further this year.

As a sale of the US restaurants business is at least a year away, disposal proceeds are likely to fall from last year's pounds 104m. But the pounds 121m of purchases pushed gearing up to 36.4 per cent.

This is not yet uncomfortable but it is a potential brake on expansion, particularly seeing that dividends have not been fully covered by free cash flow for the past three years.

That may explain the company's reluctance to promise that dividends will rise in line with earnings now that cover has been restored to twice. Analysts are expecting an increase to 18p from 17.3p last time, in line with the expected increase in pre-tax profits from pounds 113.5m to about pounds 118m.

That puts it on a forward multiple of 10.5 and a yield of 5.8 per cent. While that looks cheap, the pressures of the food market mean it will stay that way.