While acknowledging that there is “no silver bullet”, to remedy the group’s problems, analysts Clive Black and Darren Shirley said it was also not ‘mission impossible’.
After the meeting, the analysts upgraded their long-standing sell recommendation to hold, citing their confidence in the management of ceo Michael Clarke – appointed in August 2011.
“The appointment of Mike Clarke as ceo of Premier Foods was a key factor behind our decision to upgrade our recommendation on the share.”
Black and Shirley welcomed Clarke’s senior appointments, including Mark Moran, the group’s new chief financial officer, who brought “necessary experience to the party”, they said.
Troubled times
“From a Premier perspective, we were encouraged by Mr Moran’s account of dealing with the troubled times he encountered before recovery at his previous company SSL, which went on to be acquired by Reckitt Benckiser.”
The three top priorities for the firm were to: stabilise and improve trading performance and earnings before interest, taxes, depreciation, and amortisation, reduce the firm’s substantial debt, which totalled about £1bn at the end of last year, and manage “enormous pension responsibilities, particularly with the RHM [Rank Hovis McDougall] fund”.
While delivering the above would not be easy, Black and Shirley said the refinancing deal agreed in March brought “… important space for Premier’s senior team to stabilise the commercial activities – activities upon which all stakeholders in the company depend”.
The analysts also praised Premier’s focus on the scope for more appropriate pension conditions.
Debt reduction
Premier’s disposals would also be key to its recovery in fortunes, they added. “The disposals should bring not just cash flows, which will go straight into debt reduction, but also scope to possibly reduce the operating cost base beyond the parameters set out by management to date.” That was about £40M by December 2013.
While the analysts said they could not predict the nature and extent of disposal deals, they will not involve the eight Power Brands. “So, it will be secondary brands and private label activity, potentially including own-label bread we sense,” they said.
Black and Shirley added: “We discussed the UK bread industry and, while the structural problems are considerable, there could yet be change that makes for a more efficient supply chain down the line. Any such progress would be industry wide and could yet provide benefit to Premier’s cost base.”
In the short-term, they saw little scope for share growth but noted that it had nearly doubled from its pre-refinancing lows.
But with “good management in place”, the analysts said they expected the shares to hold their value.
“Quite simply, management needs time to see through its disposals, cut its cost base and support the top-line,” concluded Black and Shirley.