Irish cheddar threat hits Dairy Crest

Worries about a potential price war for cheddar sent Dairy Crest tumbling on Friday.

According to Societe Generale, Dairy Crest's Cathedral City cheddar is at risk of more aggressive competition from supermarket own brands, which come largely from Ireland.

Cheese provides about half of Dairy Crest's earnings with market share gains for Cathedral City providing much of its recent growth.

But European Union quotas restraining milk production since 1984 are due to end next year. That, in combination with low feedstock costs and a slowdown in Chinese import demand, will create a supply glut, according to SocGen.

"The removal of production quotas for EU milk in 2015 is likely to have negative consequences for Dairy Crest's key profit engine, UK cheese," SocGen said.

"Ireland targets a 50 per cent uplift in milk production by 2020, much of which will be processed into cheese and exported. This is likely to result in a material increase in Irish cheddar exports to the UK."

While Dairy Crest is doing the right thing by diversifying into areas such as baby formula, the margin pressure on its UK business will weigh both on earnings and sentiment, SocGen said.

It set a 440p price target on the stock, which slipped 3.4 per cent to 440.1p ahead of a trading update on Tuesday.

The wider market broke a four-day losing streak, lifting the FTSE 100 by 0.3 per cent, or 17.8 points, to 6,690.17. For the week the index was down 2.6 per cent, its biggest weekly decline since March.

Leading Friday's gainers, Shire jumped 5.9 per cent to £48.70 in the closing auction on a newswire report that the group had opened talks with AbbVie over the latter's $30bn takeover approach.

At the close of trade, Shire was yet to formally respond to AbbVie's takeover offer made four days before.

Imperial Tobacco gained 3 per cent to £27.40 after confirming it will consider buying "certain asset and brands" from US peers Lorillard and Reynolds, which are in takeover talks.

Imperial was said to be lining up around $7bn in debt financing, which analysts said could pay for brands making about $1.1bn in operating earnings.

"Depending on the range of cost synergies, we could see this acquisition offering 12-15 per cent EPS accretion versus our 2015 forecasts," said house broker Morgan Stanley.

A Goldman Sachs upgrade to "buy" lifted Coca-Cola HBC 3 per cent to £13.51. Political uncertainty in Russia, Ukraine and Nigeria is already reflected in the price while a slide in European sugar prices will reduce costs, Goldman said.

Royal Dutch Shell's B stock rose 0.9 per cent to £25.30 after JPMorgan Cazenove turned positive.

JPMorgan raised its long-term oil price forecasts to above-consensus levels to reflect increased demand and tighter supply from Iraq and Libya.

This presents "a tactical opportunity for equity investors to raise exposure to names most leveraged to this rising oil price outlook", the broker said.

It "also transforms Shell's free cash flow, shifting it to a small deficit in 2015 and a surplus in 2016".

Alent climbed 3.1 per cent to 347.9p after Liberum put a 400p target price on the maker of solder material and electroplating chemicals.

Cash flow looks robust and a 14 per cent discount to the UK chemicals sector looks unwarranted, Liberum said.

Polymer maker Synthomer was down 3 per cent to 212p after flagging up margin pressures in its Asian nitrile business, partly caused by destocking by glove manufacturers.

African Minerals lost 2.4 per cent to 72p on a downgrade from Merrill Lynch, which forecast the iron ore market to remain oversupplied next year.

African Minerals' investment plans at its Sierra Leone mine risk stretching its balance sheet, which was carrying $836m of gross debt at the full-year 2013, said Merrill.

The broker also turned cautious on Kazakhmys, down 2.7 per cent to 315.2p.

Scrappy selling pushed Outsourcery, the cloud computing host, 10.9 per cent lower to 28.5p.

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