Graham Jones from Panmure Gordon wrote in a note this morning: “Premier gives a long line of reasons why its performance was so bad in H1, but the comment that ‘as a direct result of our successful pricing exercise, one of our major customers delisted a significant number of grocery lines’, really is amazing.”
In Panmure’s estimation, Jones continued, “price rises can’t really be deemed successful if they come with a big lag and annoy a major customer so much that they pull significant amounts of your products off shelves”.
In today’s trading statement covering January 1 to June 25, Premier revealed sales of £974m down 0.9% on 2010. Profits fell by 29% from £94m to £67m.
Given that the £67m figure includes an £11m pension credit, Jones described the underlying result as “truly awful”.
Drive brands delisted
Input inflation running at 14% year-on-year cost Premier £15m in the first quarter, as the firm faced delays in recouping costs from consumers.
“This was implemented so successfully that Tesco decided to delist a significant number of lines, costing Premier a further £10m in the second quarter,” Jones noted drily.
Premier said that Ambrosia, Sharwood's and Loyd Grossman sales, which form part of its priority ‘drive brand’ portfolio, were particularly affected by the spat. Hovis sales volumes fell just 2.7% in H1 against market levels of 4.5%.
But other drive brand sales volumes slumped 10.6%, compared with a 4.2% dip across the market in these categories.
Grocery and bread markets fell 4% in the first quarter, while Brookes Avana suffered an £11m profit slump after the loss of a Marks & Spencer pie contract worth £30 overall, which will be lost in stages over this year.
‘Eye watering’ debt
Given that net debt after recent disposals (£972m) still runs at four times earnings before interest, tax, depreciation and amortisation (EBITDA), Jones wondered whether new ceo Michael Clarke would opt for further “hugely dilutive” equity funding when he arrives on September 1.
“The really disappointing thing about the poor profit performance is that, despite the disposal of canning and meat-free businesses [for a combined £362m] proforma net debt to EBITDA remains stubbornly high,” said Jones.
Looking forward, Jones said one could make a case for Premier’s share price doubling in the second half of 2011. If H2 margins, profits and cashflow improved under Clarke’s tenure, he said, then an equity raise may not be necessary.
Premier reported an improvement entering the second half of 2011 as it passed on cost increases and resolved the Tesco dispute; it expects cost savings as a result of logistics and head office reorganisations to raise £20m by 2013.
But equally, Premier warned that the success of its full-year results depend upon important yet potentially tough Christmas trading.
“Most potential investors don’t seem willing to get involved until they have heard new ceo Michael Clarke’s views. That is probably sensible,” Jones said.