Martin Deboo, analyst with Investec, described the results posted yesterday (July 23) as “very strong”, with trading profits 50% ahead.
While “a great result” for the firm, Deboo worried about growth prospects. “Our offsetting concern is around growth, which decelerated in the second quarter outside the Power Brands and where first-half profits benefitted from a reduction in marketing investment,” said Deboo.
Underlying growth in the business as a whole, decelerated from 1% in the first quarter to -1% in the first half. This reflected falling sales of support brands and non-branded products, which represented about 30% of sales, said Deboo. “Some of this may reflect falling input costs, but we think [Premier Foods] needs to manage its overall growth profile carefully.”
Consumer marketing also fell by £6M in the first half. Premier Foods highlighted efficiencies and phasing, but Deboo questioned what the “low marketing:sales ratio” by UK grocery standards.
Investec repeated is ‘buy’ advice on the firm’s stock.
‘Gone too far’
Panmure Gordon took a more bearish view, issuing a ‘sell’ recommendation. Graham Jones, its executive director, worried that the share price rally had “gone too far”.
Jones noted a 50% rise in earnings before interest, tax and amortisation (EBITA) to £47.4M after allowing for disposals. But on a continuing basis, a fall from £72.4M gave a better indication of “the shrinking” of the group, he said.
After the firm delivered its targeted cost savings to the bottom line and announced a further £10M of savings to be delivered in the second half, Panmure Gordon raised its full-year EBITA forecast from £141.6M to £146M. Profit before tax forecast was raised from £78.6M to £83M.
Grocery profits were flat at £77.4M while the bread business posted profits down by 24% to £14.3M.
Pension fund liabilities
But the key challenge for the firm remained its balance sheet and pension fund liabilities, said Jones. He believed a £200M equity raise was “a rational course of action”.
“Premier has done well to deliver cost savings to the bottom line but we still believe its balance sheet structure is unsustainable, and a further equity injection is required,” concluded Jones.
Panmure Gordon downgraded its advice to ‘sell’.
Shore Capital took a more circumspect view – retaining its ‘hold’ recommendation. Its analysts Darren Shirley and Clive Black said the “ongoing engineering” that was taking place to revive the firm’s fortunes by simplifying its business was “bearing fruit”.
But the most revealing details in the trading statement were not about trading and reorganisation process, but the group’s capital structure, they said. The need for restructuring was evident bearing in mind first-half net debt at £890M and the IAS 19 pension deficit amounting to £303M.
Combining an equity issue with a corporate bond would “considerably liberate” Premier from its balance sheet burdens, said Shirley and Black. “We see such activity as being key to the stock’s re-rating capability, potential to be a target for take-over activity and even scope to pay a dividend in due course,” they said.
Read more about Darby's insistance that his turnaround strategy is working here.
What analysts advise on Premier Foods’ stock
• Investec – Buy.
• Shore Capital – Hold.
• Panmure Gordon – Sell.