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Patties Foods Limited scraps dividend: Should you sell?

Patties Foods Limited (ASX: PFL) has today reported a 6.1% decline in half-year net profit to $8.2 million for the period ended 31 December 2014, and has shed further light on the situation regarding the recall of various frozen berry products in response to a Hepatitis A outbreak.

The Results

During the reporting period, Patties Foods’ profit margins were impacted by higher input costs (in particular meat), a $792,000 restructuring charge and an important strategic investment in marketing.

This strategy appears to have paid off over the period with group revenue having jumped 9.1% to $138.1 million with positive growth recorded in its iconic core brands, including Four’n’Twenty, Patties, Herbert Adams and Nanna’s. When those one-off costs are excluded, Patties Foods posted an underlying net profit of $9 million up 3% on the prior corresponding period.

Frozen Berries

The period for which Patties reported was not impacted by the voluntary recall of various frozen berry products, which began on 14 February in response to a Hepatitis A outbreak. The company said: ”The net potential impact of the voluntary frozen berries recall is impossible to ascertain at this early stage, although it is possible that ultimately the impact could prove to be material.”

As at 31 December, $1.7 million of inventory was on hand, with best before dates in the range of the recall product. While the financial impact on asset values and future earnings could include principally redundant inventory, one of the bigger dangers is the impact it will have on the product line’s reputation and future earnings.

Given that Hepatitis A has an incubation period of up to 50 days, the situation could certainly get worse before it gets better for Patties Foods. As such, management decided not to declare in interim dividend.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned. You can follow Ryan on Twitter @ASXvalueinvest.

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