Premier Foods unleashed some impressive first-half results on Tuesday (10 November) with a notable reduction in the UK manufacturer’s debt, along with a leverage target appetiser. It would seem the company has finally shrugged off the ‘zombie’ appendage that has plagued the business for some time. Could M&A now feature in its plans? Simon Harvey looks at the road ahead.
A turnaround of Batchelors soups owner Premier Foods is bearing fruit under the auspices of a relatively new executive team, judging by the company’s latest financial results, leading to speculation the doors could open up to acquisitions.
Chief executive Alex Whitehouse and his finance counterpart Duncan Leggett, who were both promoted around the same time last year, have other challenges to traverse in the immediate term which remain out of their control – Covid-19 and Brexit, irrespective of whether the UK gets a trade deal with the European Union or not.
However, Premier’s underlying trajectory is looking good, with inroads made in reducing a historically substantial debt pile, and the completion of a strategic review, culminating in a planned merger of two sizeable pension funds.
Premier’s commitments to those funds and the servicing of creditor obligations have, in the past, have led to disparaging remarks from some analysts because the liabilities have restricted reinvestment in the business. And, in the absence of creating additional value for shareholders, who have been deprived of dividends for some time, the stock price has plummeted from its lofty heights in the early noughties.
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That’s all now changing under the new leadership. Despite his short time in office, Whitehouse has shaved GBP87m (US$115.2m) off Premier’s debt, which he revealed on Tuesday (10 November) stood at GBP383m at the end of the first half in September, compared to GBP523m back in 2017. And that’s without any contribution from the GBP37m the company has just raised from the sale of its 49% stake in the Hovis bread business to private-equity firm Endless.
He’s also achieved a historically low leverage ratio of 2.3 times, down from 3.2 times in 2018, and has put in place an ambitious target to reach 1.5 times in the “medium term” based on net debt to EBITDA. Premier has received a credit-rating upgrade from Standard & Poor’s and Moody’s Investors Service, which should push down future borrowing costs for the Sharwood’s sauces maker.
The stock price has reacted accordingly, trading shy of a pound on Wednesday, more than double what it was at the start of the year, but still down from north of four pounds during the period 2004 to 2007.
M&A opportunities
For more than a decade, Premier has been absent from the M&A market, and rather than making acquisitions has been focused on disposing of elements of the business, an aspect that was expected to materialise again from the recent review.
While such a scenario didn’t play out immediately, management opted to sell control (and ultimately dispose of) Hovis, but stayed the course with the Batchelors and Mr Kipling brands, which had been the subject of divestiture speculation in the media. A sale of the Ambrosia custard brand was pulled last year after Premier failed to attract a satisfactory price.
So does the reduction in debt provide room for manoeuvre for Premier to restart acquisitions? Clive Black, an analyst at Shore Capital, thinks so, with bolt-on deals the most likely option given comments from CFO Leggett.
“It does start to open up, quite quickly, other opportunities for capital deployment and they may well include investing back into the business,” the CFO told analysts. “We do have opportunities for example to reinvest back in our factories … investing in the brands and then ultimately one starts to see on the horizon the possibility of bolt-on M&A. But the short-term focus, I would suggest, is still on net debt reduction but that doesn’t preclude us from doing anything that might come along in the medium term before we get to that 1.5 times.”
Black tells just-food: “Equity markets will sleep pretty easy with a cash-generative staple food manufacturer with debt/EBITDA of 1.5 times, bearing in mind 2014 was five to six times. And that’s why it’s traversed from being a zombie with debt on the millstone to a functioning company.
“That leveraging frees up a lot of resource and gives Premier optionality, so I can see capital being allocated in a number of ways when they get close to, or indeed surpass. 1.5 times.
“From a focus perspective, I think bolt-on acquisitions can be expected and I would expect it to be similar or contiguous proprietary brands set against the present portfolio. From a more transformational M&A perspective, I don’t think we can rule that out either.”
Martin Deboo, an analyst at Jefferies International, says Premier needs to be cautious in undertaking any acquisitions too soon in the recovery process to save spooking investors, although he expects M&A to surface.
He tells just-food: “I think they are sensible enough to know that Premier plus acquisitions is sort of an equation that would immediately strike terror into the mind of the market. The barrier will be high, but yes, I think they certainly have the envelope now that they can start to think about that.”
Premier a target itself
However, with company valuations low amid the pressures on businesses from Covid-19, Premier could find itself in a position where it becomes an acquisition target in its own right, as it did in 2016 with an approach from US sauces and spices maker McCormick & Co., a move that failed to culminate in a deal.
Black says: “A British company is getting taken over every minute, literally, and the relative weakness of sterling, and the stars aligning more favourably around a coronavirus vaccine and potentially a Brexit deal, mean that if you are going to strike, strike soon. And Premier Foods is absolutely vulnerable to a takeover.”
Premier is primarily a branded food business but with a presence in private label, too, albeit small.
Growth in branded revenues outpaced the group as a whole as the company won market share across all its categories, and, according to Premier, it grew “faster than the market”.
Revenues climbed 15% in the first half through September to GBP421.5m, with the branded segment up 18.6% at GBP367.3m. Non-branded dropped 4.9% to GBP54.2m due to a decline in the sweet treats part of the business.
So what might the future hold for the private-label business? Jefferies’ Deboo says the non-branded portion looks set to remain, a view shared by Black.
Deboo says: “It’s been generally declining but it plays a role as a capacity filler, particularly in cake, where frankly they have more capacity than they really need. And they have this very successful Christmas mince pies business, so it does play a tactical role. It’s down to 15% of group sales, it’s pretty small.”
Black adds: “They’ve appraised the non-branded segment back and forth over the last decade. I don’t see it as a core focus of management with respect to additional capital expenditure or bolt-on acquisitions, but at the same time, I don’t think they will throw a baby out of the bath water.”
Christmas could also be a potentially fortuitous time for Premier if Black’s predictions prove accurate. “We think Christmas 2020 will be massive with millions of more Britons on the island than normal due to transport restrictions. And, as a result of that, I think several billion pounds more trade goes into retail this year than normal. So Premier has to operationally execute that.”
Heavy lifting in international
CEO Whitehouse has been pushing Premier’s international agenda for a division set up in 2014. To better align that part of the business with the vagaries of individual markets, he has assigned specific management teams on the ground in Australia, Ireland, the US and Canada.
During the half year, Premier entered a new category in Ireland – baking mixes – and gained market share in other product areas. In Australia, it introduced a new range of oriental Sharwood’s sauces and began a trial in Canada for Mr Kipling cakes, described as more of a “test and learn” strategy.
Whitehouse said he was “very encouraged by the rate of sale” in Canada.
International revenues grew 14% in the first half, after a disappointing fiscal 2019.
It may be too early for Premier to consider new markets given, in Black’s view, Whitehouse has had to do “quite a bit of heavy lifting” in an area that “was a problem child” but he thinks there’s an option on the table.
“On an ongoing basis, if they can show consistency with delivery with people now on the ground, then there will be a capability to add additional categories into those markets, which means in one, three, five years’ time, international could be a more meaningful component of incremental growth,” Black says.
“They could clearly add further markets if the opportunity was there. Not for now. Canada is a new activity that is going well but it’s still in trial, and in America they still have to bed in a distributor. I think over time you could see the products in the Middle East, in South Africa and other elements in Britain’s old manor.”
Deboo, however, believes Premier could get overstretched if it expands too far on the international front and suggests the division is not so much at the heart of Whitehouse as it was under Gavin Darby, the CEO he replaced in 2019.
“It’s been a bit up and down again in international. I think international has a lower priority than it did and probably quite wisely as well,” he says. “They need to be careful about not allowing the cost base of that business to get out of hand by too much empire building.”
Premier is generating the returns to put it in a position to reinvest in the business, particularly in new product development as consumer trends evolve.
On Tuesday, the company reported a 14.4% gain in first-half adjusted EBITDA to GBP74.9m, and a 28.7% increase in trading profits to GBP65.8m. Operating profits climbed 29% to GBP65.2m and adjusted profit before tax rose 50% to GBP47.7m. Profit after tax was up 31% at GBP43.4m.
Covid-19 has played a part in elevating those numbers as people were confined to cooking at home. Key for investors will be whether Premier can keep up the momentum once people are able to eat out again, and what challenges Brexit will present next year.
Whitehouse said Premier is focused on “protecting and preparing the business” beyond Covid and the company has so far “proved resilient” to the crisis based on the “strength of its brands”. As far as Brexit is concerned, the Saxa salt owner has been preparing for the “worst-case scenario” for the past three years, even before he became CEO.
Looking ahead, what might investors be hoping for from Premier in the near term?
“They want to see the fruits of Covid invested into a business that has steady and sustainable growth going forward – low-single-digit growth,” Deboo says. “Secondly, I think they will want to see a return to dividends at some point, which is definitely on the cards. A steady cash income stream will stabilise the share price and evaluation.”
Meanwhile, Black at Shore Capital estimates the amalgamation of the pension funds could save Premier around GBP15-40m a year, depending on when the merger is signed off. As of September, Premier’s own pension scheme was in deficit to the tune of GBP405m, while the RHM fund was carrying a GBP921.5m surplus.
“Fundamentally, Premier Foods investment thesis has been transformed this 2020. The stock is no longer a basket case where bankers and pension funds were more important than shareholders. It remains a business that’s come a long way but a bit of a way still to go.”
