Avonmore-Waterford is likely to include rationalisation provisions of around £145 million and goodwill write-offs of £111 million in its first set of results after the merger, according to company broker Davy.

AWG is due to announce within the next few weeks the scale of the rationalisation after the merger between Avonmore and Waterford, but it is expected that plant closures and rationalisation of the distribution operations will involve the loss of around 700 jobs.

The £111 million goodwill charge arises because AWG will operate the Avonmore policy of immediately writing off goodwill against the reserves, rather than writing off goodwill over a period of years as was practiced by Waterford. This means that the accumulated goodwill on the Waterford balance sheet will be written off in the AWG 1997 results.

The end result, according to Davy, is that AWG will report a 1997 loss of £87.3 million with a loss per share of 103.9p. The adjusted earnings per share, when the once-off costs are excluded is expected to be 14.1p, according to the broker.

But taking the charges up front in the first set of merged accounts means that 1998 will show a radical transformation in Avonmore/ Waterford's results, and the Davy analyst is forecasting 1998 profits of £90.5 million and earnings per share of 23.2p. Further ahead in 1999, the Davy analyst expects earnings per share of at least 27.8p and possibly as much as 30p.

The 14.1p earnings forecast is substantially lower than Davy's 19.1p earnings forecast for the former Avonmore. About 2p of this earnings slippage is due to specific Avonmore items including the cost of paying a higher milk price. The balance is due to the dilutive nature of the merger with Waterford. This earnings slippage should however, be quickly recovered as the effects of the rationalisation programme flow through to the 1998 results.

The changes in the goodwill treatment and the provisions will mean that Avonmore/Waterford's 1997 debt of £274 million will represent a gearing of 265 per cent. "The group's financial position will quickly strengthen on the back of annual net cash generation (before disposals) of £50 million. So by end 1999, total debt to net cash flow will be no higher than five times," said Davy.

The current share price of 275p represents a multiple of just over 12 times 1998 and nine times prospective 1998 and 1999 earnings.

"This reflects the contingency of the earnings outlook on a savings programme which remains to be finalised and implemented. But as this is perceived to proceed to plan, as to scale and timing, the stock should be re-rated and begin to capture the share upside of 350p/400p price target which is not demanding on a 28p/30p eps out-turn for 1999," concluded Davy.