On the money: City ponders Premier's future
Premier shares plummeted after latest profit warning
The City weighed up the future for Premier Foods plc after the UK's largest food maker published another profit warning today (7 October).
The admission from Premier that its annual profits would be "below market expectations" sent its shares tumbling. The company's stock stood at 5.98p at 15:23 BST, down 40.2% on the day.
The profit warning came after Premier said its group results for the third quarter of the year were "significantly below" its expectations. Tellingly, the company said "market trends" had "improved" but admitted it had "under-performed versus the market". Sales revenue and volumes in the three months to the end of September were down. Branded sales dropped 6% on the back of a 10.4% decrease in volumes.
Furthermore, Premier admitted that its performance in the third quarter meant its net debt at the end of the year would be higher than the market expects.
It was the latest warning from Premier this year. The company made a similar announcement in June ahead of its half-year results. However, today's warning was in the first trading update given by new chief executive Michael Clarke, who joined Premier from Kraft Foods in August.
MF Global analyst Andy Smith was unsurprised at the latest admission from Premier. The renewed focus UK food retailers are putting on price is having an impact on suppliers, he said. "We felt that a number of the UK mid-caps appeared vulnerable to the wave of supermarket pressure," Smith explained. However, he added: "We note that recent price aggression, particularly on the part of Tesco, is particularly bearish for Premier."
Investec analyst Martin Deboo cut his forecast for Premier's 2011 EBIT by more than 10% to below GBP200m (US$311.2m). He estimated that the company's net debt would "likely be in excess of GBP900m" at the end of 2011 and added that its pension deficit "is in GBP500m territory". He added: "The equity is now a sliver".
Deboo believed the latest warning from Premier would cause investors to ponder the very existence of the Hovis and Bisto maker. "The critical question facing Premier and its shareholders this morning is whether the company can survive and whether there is any value left in the equity at all."
Premier is in talks with its lenders over its banking covenants. Its debts mature in December 2013 and the company is looking to refinance those debts beyond that date. Deboo said a "technical" breach of Premier's covenants is "almost inevitable" but said the company's statements on its financing were "notably firm" and insisted: "Our judgement is that the company will survive in some form."
Clarke himself insisted Premier remained a company of "substantial" opportunity. He said a focus on eight "Power Brands" with the "best growth prospects" - Ambrosia, Batchelor's, Bisto, Hovis, Loyd Grossman, Mr Kipling, Oxo and Sharwoods - alongside improved sales and marketing as well as further cost cuts would help build "a more profitable business".
The development of a focused portfolio of Power Brands means an end to Premier's distinction of 'drive', 'core' and 'defend' brands, which former chief executive Robert Schofield developed in 2010 but was a strategy that some were always unconvinced would work.
Crucially, Clarke said his focus on eight brands means Premier would look to sell off more businesses. In the last year, Premier has sold its meat-free operations and its canned food arm and more disposals appear certain - not just to free up cash for the major brands but also to service the company's debts.
As Shore Capital analyst Clive Black noted, Clarke "has his work cut out". Black said Shore Capital the company's problems were "Premier-centric" and the business could not be compared to other food manufacturers in the UK.
However, Black said the new Premier chief executive needed to be given time and said plans to refinance the company's debts, to invest behind key brands and to reduce the size of the business were "commendable".
Nevertheless, he added: "With profitability going backwards apace we must remain cautious. Hence, until refinancing is complete and the trading performance stabilises and indeed improves, we remain concerned as to the value available to equity investors."
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