Bottom Line: Feeding off the other

NORTHERN Foods is a tale of two businesses - a commodity one supplying milk to doorsteps and meat pies to corner shops, and an added-value one supplying gourmet meals and chocolate biscuits to the large supermarket groups. The question is how quickly will the first kill off the second?

The company itself admits to surprise at how severely milk deliveries and corner shops have been hit by the supermarket price wars.

Almost one customer in every eight abandoned the milkman's 35p-40p pint in favour of the 21p one available in some of the discount stores; sales of yoghurts and meat pies through corner shops fell even more.

Northern Foods' strategy is to manage the decline by cutting costs and adding volume. Thus a 400-delivery van fleet has already fallen to 250 and could drop to 150; milk businesses are snapped up as they become available.

The difficulty of keeping up with the pace of change is demonstrated in a 3.4 per cent fall in dairy profits to pounds 88.9, despite an increase in sales to the large supermarkets, and a 10.9 per cent drop in meat products result to pounds 18m.

In an ideal world, the second business would be growing fast enough to compensate. But with prices falling for the first time since the 1930s, by 2 per cent last year, volume increases - barring Marks & Spencer and Fox's biscuits - are difficult to achieve.

Northern's chairman, Christopher Haskins, believes that the excess retail and manufacturing capacity will eventually have to come out.

Having moved up just 2.6 per cent to pounds 157.2m last year, taxable profits are likely to be similar this year, as are earnings - 20.51p last time. A 4.8 per cent increase in the dividend to 8.8p shows it knows the importance of yield to its rating and it is likely to offer a further 0.3p rise this year.

That puts it on a forward multiple of 10.2 and a yield of 5.4 per cent. That looks cheap but, until the food market settles, it is likely to remain so.