Premier Foods plc revealed a robust set of sales figures this morning (25 April), as a 3.7% increase in ‘power brand’ sales drove group sales up 1.3%. The group has seen its stock rebound of late as management has worked to convince the market that it is getting to grips with Premier ‘s debt burden and working to reverse declining sales while also bolstering margins. However, the spectre of Premier’s high debt level still looms large, especially given the current tough operating environment, and it seems that City analysts view this threat in varying degrees of severity.
“The new future has got off to a reassuring start with a return to positive sales growth and trading in line with expectations. The suitably cautious and sober tone is also a positive for us. Cost reduction is on track but margin performance will be a question mark given the commodity cost environment and what looks like still-weak price realisation…. Our concern this morning is around what might be happening to margins, which won’t be visible until the H1 in August. We can be confident that Premier will still be seeing a lot of agricultural commodity cost inflation and renewed crude oil inflation in what is a diesel-intensive business given bread logistics. Against this, the inference from the sales growth number is that price realisation must still be very weak…. We are not anticipating material change to our FY12 forecasts, which assume flat organic sales for the year and a 20bps increase in operating margins (which in turn reflect an anticipated stronger H2). We remain comfortable with our Buy case ” – Martin Deboo, Investec
“We believe the share price rally has been overdone. Further disposals are still necessary in order to meet banking covenants in our view, and we expect these to be at prices below the current group EV/EBITDA of 8.7x for 2012E (including net pension deficit). We believe CEO Michael Clarke has adopted the right strategy, but investors should not under-estimate the scale of the issues, with net debt/EBITDA remaining at an eye-watering 5.6x and much of the free cash flow of the group over the next five years, in our view, being absorbed by bank fees and pension deficit contributions. Sell.” – Panmure analyst Graham Jones
“It is no surprise to our minds that management has confirmed its target of GBP40m (US$63.4m) of cost savings by 2013… Management has also reiterated that it will ‘continue to divest selected business to sharpen focus on its power brands’, and importantly meet the covenants contained within its refinancing package … We believe that the successful delivery of such disposal proceeds, and the dilutive impact on sustainable cash flows, is as important to Premier’s future (and stock performance) as a recovery on the operating performance and the growth of power. It remains early days in Premier Food’s recovery programme, though the current signs as evidenced by today’s statement look encouraging to our minds… we retain our Hold recommendation on the group’s shares.” – Darren Shirley, Shore Capital