Profits of almost £500,000 from the leasing of the milk quota of the 3,000acre An Grianan farm was the main reason for strong growth in pre-tax profits at Donegal Creameries.

Pre-tax profits in Donegal's debut year on the stock market rose from £2.1 million to £2.5 million.

But in the core dairying and agri-trading business, operating profits fell from £1.9 million to £1.8 million despite a 10.5 per cent increase in group turnover to just over £50 million. A final dividend of 2.3p has been declared, bringing the total payout for the year to 4.5p per share.

Donegal, however, took in £601,000 in income from financial assets - primarily the £498,000 profits from the leasing of the An Grianan milk quota. This is likely to be a recurring item in Donegal's accounts in the years ahead and will be a valuable buffer against competition in the dairy business.

In the dairy business, turnover rose marginally to £27.6 million, with Donegal collecting 21.35 million gallons of milk from suppliers in Donegal, Sligo and Northern Ireland. The liquid milk section of the dairy business was hit by competition although volumes were maintained, while there was satisfactory growth in UHT and long-life milk business.

Agri-trading sales fell from £11.4 million to £11 million, mainly due to a fall in fertiliser and animal feed sales. Irish Potato Marketing and Donegal Potatoes - which were acquired last September - contributed £150,000 to the group's pre-tax profits in the four-month period to the end of December.

Looking ahead, chairman, Mr Lexie Tinney expects another satisfactory year, although dairy processing margins have been hit by the pound/sterling exchange rate, lower profit margins on the sale of milk to other processors and surplus milk from Milk Marque coming onto the British market. Poor weather in April also hit sales of fertiliser, although these were countered by higher sales of animal feed.

In recent years, the acquisition of Robert Smyth, Irish Potato Marketing, Donegal Potatoes and the An Grianan estate has broadened Donegal's base and reduced the dependence on milk processing. Mr Tinney says that the group is looking at other investment opportunities.

With net cash of £1 million at the end of the year, compared to net debt at end-1996 of £691,000, the group is in sound financial shape to make acquisitions.