Martin Deboo, analyst with Investec, said: “Premier’s shares continue their drift south, fuelled most recently, in our view, by an Financial Times story on the need for fresh equity. But we have been discounting such an eventuality for months now.
“The shares are off 15% since March 28, when the FT ran a story suggesting that Premier was contemplating raising fresh equity”.
Investec resumed its ‘buy’ recommendation on Premier’s stock and retained its 95p price target.
But Deboo noted that, at three times earnings, Premier’s cost of equity was “north of 20%”. He added: “This doesn’t add up to sensible financing for us. We have been arguing, since September, that an injection of fresh equity is the only sensible way out. Our existing 95p price target reflects this.”
Mike Clarke’s shock departure
Share value had also suffered from former boss Mike Clarke’s shock departure. “The shares are below 70p and have under-performed the FTSE 250 by 45% since the surprise resignation of former ceo Mike Clarke, on 28 January,” said Deboo.
But Investec predicted the unseasonally cold weather could boost Premier Foods’ trading when the firm reports its first quarter results on April 23. The firm’s winter trading in the fourth and first quarter has proved sensitive to climate historically following the unseasonably warm weather in the first quarter of last year.
A continuing risk for Britain’s largest food manufacturer was the successful restructuring of its bread business. “Aside from the first quarter, the implementation risk from Premier’s restructuring of its bakery operations – underway as we write – is the key concern,” said Deboo.
Pension deficit
In the medium term, borrowing and the pension deficit continued to present challenges.
“We have speculated on a £300M, one-for-one raise,” said Deboo. “With net debt post-raise at about three times EBITDA [earnings before interest, tax, depreciation and amortisation], rather than the current five times and peers like Dairy Crest trading on 12 times, this looks interesting to us.”
Meanwhile, Premier Foods was probably now “a zombie company”, warned City analyst Panmure Gordon at the end of last month.
Its executive director Graham Jones said in a note: “If a zombie company is defined as one that can afford to pay its interest and pension liabilities, but is not able to reduce high levels of debt, then we think at the moment Premier probably meets that definition.”
Despite disposal proceeds now totalling £370M, Panmure Gordon forecast net debt/earnings before interest, tax, depreciation and amortisation of 4.9 times for this year.