Donegal Creameries plc (Donegal) generated an operating profit of €843,000 for the first six months of the year, compared with a loss of €700,000 for the same period last year.

Revenues are up 29% for the period, to €45.3m, boosted no doubt by the late potato harvest last year.

Across most other key financial metrics, Donegal delivered a very robust set of results.

Operating cashflow improved from a negative €386,000 for the same period last year to over €1m this year. Adjusted earnings per share increased from 4.2 c/share to 7.2, and overall bank debt was reduced by €3.3m to €18.3m as of 30 June 2013.

Following Donegal’s sale of its liquid milk and stores business to Connacht Gold and the acquisition of Scottish-based seed potato grower, AJ Allan, the vast majority of Donegal’s annual profits are now associated with their seed potato business.

Therefore, managing and diversifying both grower (weather) and market (supply/political stability) risks pose an increasing challenge for Donegal, which has developed into Mediterranean markets such as war-torn Syria. Recent developments there and the associated political impasse undoubtedly pose new challenges for developing such markets.

Donegal has also focused in recent years on diversifying grower risks with more Dutch, Scottish and French growers working with the company now.

Division Analysis

Produce: turnover within this division increased 18% to €15.1m and the group remains satisfied that planting earlier this year was in line with plans in terms of acreage.

For 2013, full-year performance will depend heavily on yields and pricing agreed with growers and customers in the final quarter of 2013, when approximately 75% of Donegal’s annual profits are earned. This is the period when seed potatoes are delivered to their respective customers.

The integration of AJ Allen is progressing well and Donegal remains confident that its proprietary certified seed potato business will drive growth and profitability into the future.

Food/agri: revenues increased by 35% within this division for the first six months of 2013, driven by increased demand for animal feed due to the adverse weather conditions earlier this year.

In addition, its speciality dairy division also performed well within the British market. Sales of dairy products and ready meals, e.g. Rumblers, Chef in a Box, continue to grow strongly in Britain, albeit from a comparatively low base for this relatively new business.

On the other hand, Ireland remains a challenging consumer environment for their Organic For Us products, where ongoing discounting and promotions continue to depress profit margins.

Associates: Donegal’s main associate is Monaghan Mushrooms, in which it has a 34% stake. That firm has finalised the acquisition of Prima Champ, an integrated mushroom business headquartered in the Netherlands. The company outlined how this business is currently being integrated and will increase Monaghan’s overall presence in mainland Europe.

Financial

Donegal’s balance sheet still remains heavily reliant on bank debt. While falling by over €3m since last year, net debt remains at €18.3m.

Donegal has declared a dividend of 7 cent per share and is guiding adjusted earnings of 50 cent per share for 2013.

Net assets value per share fell by 9% during the period, primarily as a result of the adverse effect of sterling on the group’s balance sheet. Donegal’s share price is up over 48% year to date.