Dairy Crest Group PLC’s (LON:DCG) decision to switch future annual increases in pension payments to a lower measure of inflation has been welcomed by analysts at Numis, boosting its share price.
Numis raised its target price to 655p from 630p and repeated an ‘add’ rating on Dairy Crest after the company said pension payouts will now rise in line with the consumer price index (CPI) rather than the retail price index (RPI).
RPI is usually a higher measure of inflation, reaching 3.6% in July compared to 2.6% for CPI, meaning that Dairy Crest expects to reduce its future pension bill.
“Overall the net effect removes about £100mln of potential future liabilities and represents a significant step forward in reducing its pension liability in our view,” Numis said.
Numis expects an increase in free cash flow in the near term as a result of lower cash contributions to pensions under the traditional defined benefit scheme.
The broker now forecasts net debt of £236mln in fiscal year 2018, equivalent to 2.6x underlying earnings (EBITDA).
Shares rose 1.47% to 603.50p in late morning trading.