It is two years since Dalgety launched a #186m rights issue to pay for the near-#500m deal to buy Quakers' European pet food operations. The cash call was priced at 335p. Yesterday the shares were barely above that level, closing up 1.5p at 341p. It has clearly been a rough two years for chief executive Richard Clothier and the jury is still out on whether the business is turning the corner.
At the time of the Quaker deal, the strategy to sell consumer foods divisions such as Golden Wonder and Homepride to concentrate on pet food looked plausible. But a lot has gone wrong since then.
The BSE crisis has hit the group's animal feesuds division, the rival Mars-owned Pedigree Petfoods has been aggressive on pricing and the strength of sterling has affected overseas earnings. Integrating the Quaker pet foods business cost far more than originally anticipated.
The wounds were apparent in yesterday's half-year figures with pre-exceptional profits in the six months to 31 December down #4m to #43m. It was the agribusiness division which suffered most, with the BSE-inspired export ban causing excess capacity and increased costs, which were compounded by the strength of sterling
Though pet food profits held up, the dog food business has been dented by Pedigree's marketing muscle. Dalgety's Felix brand has held off a marketing challenge by Pedigree's Whiskas brand. In dog food it will be hoping that its Winalot re-launch with the slogan "Live a lot, wag a lot, Winalot," raises sales as well as smiles.
With Dalgety's shares a long way south of their mid-1995 high of 480p, the group faces serious questions. The first is whether it can build its pet food business to do battle against Pedigree. Margins used to be measured in double digits in this business but are a long way short of that now.
Another question mark hangs over whether the group really needs four divisions. The US distribution business, which is dedicated to McDonald's, seems non-core though Dalgety is unlikely to raise more than book value for it. This business has not been helped by the slowdown in like-for-like sales at McDonald's outlets.
With the dividend barely covered by earnings, the City will start to become restless is there is not a Dalgety revival in the second half and management could find its position under scrutiny.
The animal feeds business should begin to stabilise post BSE, while the food ingredients division is solid enough.
With analysts forecasting full-year profits of #104m falling to #116m, the shares trade on a forward rating of 15 falling to 13. The real attraction is the 8 per cent yield, which should cover the downside risk and makes the shares worth holding.