THE problems facing dairy companies quoted on the stock market are not just about milk prices, say Davy Stockbrokers in its latest review. And the cheap ratings of some of the dairy companies "do not necessarily indicate hidden value, it adds.

According to Davy, the difficulties in the sector are as much if not more, about the inability of dairies to "manage" milk prices than about product prices.

The broker has recently sharply downgraded its forecast for Waterford Foods profits for the current year from £29.9 million to £25.5 million and the 1997 forecasts from £31.3 million to £28.9 million.

Davy has also forecast a fall in Golden Vale profits in the current year from £16.5 million to £12.2 million, although it expects Avonmore profits to rise from £32.1 million to £35.1 million.

The broker warns that, despite the current bottoming out of international dairy product prices, a strong recovery in milk manufacturing profits cannot be presumed.

Davy points out the reality that, for the listed dairy companies, milk prices are determined by Dairygold.

Dairygold, the Cork based coop which has shunned the public company route, has traditionally maintained milk prices at a relatively high level even when margins have been squeezed by product price falls.

While it may be correct to argue that Dairygold milk pricing must ultimately reflect economic reality, ultimately could be too, long a time period for afflicted competitors to sustain themselves as credible listed concerns with good future prospects.

Davy notes. "There is much more substance and quality to Dairygold than some would wish to allow," and states that while the co-op is the perceived source of problems elsewhere in the dairy sector, the co-op has grown profits and cash flow annually in each of the last five years including the slump year of 1994 for the industry.

"Even if its results for this year fail to match last year's level, it's a fair bet that these will only dip. Contrast this bin turn with the sharp downward revision in forecasts for Golden Vale and Waterford Foods says Davy.