A severe downturn in its pigmeat business in the first half has taken the gloss off an otherwise good set of half-year results at the Avonmore Waterford Group (AWG).

The weakness in the pigmeat business has also led analysts to sharply reduce their full-year forecasts for AWG.

While pre-tax profits jumped almost 28 per cent to £35 million and operating margins for the group as a whole improved from 3.6 per cent to 4.4 per cent, AWG's meat division did little more than break even, with operating profits of just £548,000 - a fraction of the £5.5 million in the first half of 1997.

In contrast, the group dairy-based consumer foods and ingredients business had an excellent first-half. Operating margins in the consumer foods business more than doubled to 5.8 per cent as operating profit rose from £15 million to £29.6 million, even though sales were 6 per cent lower mainly due to the sale of the British fruit juice business.

Food ingredients sales rose by 11.5 per cent with operating profits up from £10.8 million to £14.4 million.

The pigmeat operations in Ireland and Britain were hit by a variety of factors but the most significant was a big surplus of pigmeat in Europe as a result of the Asian economic crisis. This resulted in a write-down of stock that AWG was holding for the Japanese market. Europe is now 108 per cent self-sufficient in pigmeat and this has had a devastating effect on margins throughout the sector.

Beef is not a major contributor to AWG's earnings in the first half of the year but margins in beef processing were also lower. The combination of pigmeat and beef weakness outweighed good performances in lamb processing and cooked meats. The group says that the meat division will show a considerable improvement in the second half of the year but analysts said that this will merely emphasise the volatility of the beef and pigmeat business.

On the plus side, however, AWG has been successful in moving ahead swiftly with the implementation of cost reductions following the merger between Avonmore and Waterford. Group secretary, Mr Brendan Graham said that AWG was happy the cost benefits would come through within the expected time-frame.

The post-merger rationalisation, which involves 1,300 job losses in Ireland and Britain, is aimed at generating £20 million savings this year and £40 million in 1999. Already, the group is more than halfway towards meeting the rationalisation targets, with 504 redundancies agreed in Ireland and 384 in Britain. The first half has also seen the sale of the Wisconsin dairy and British fruit juice operations.

As a result of the difficulties in the pigmeat and beef businesses, analysts have sharply reduced their full-year forecasts for AWG.

Goodbody analyst, Mr Liam Igoe has pulled back his 1998 earnings forecast from 22p to 18.4p per share and the 1999 forecast from 26.7p to 23.4p. ABN Amro analyst, Mr Joe Gill has reduced his 1998 forecast from 22.2p to 18.5p per share and the 1999 forecast from 28.7p to 24.5p.

"Meat has been shown up to be very volatile and that sort of volatility has to be reflected in price/ earnings (p/e) multiple and a p/e of less than 10 is the result," he said, adding that a share price of 240p-250p is as much as can be expected in the near term. AWG was up 10p to 240p yesterday after the results - a long way off its 357p post-merger high.