Premier Foods wins City's confidence

29-May-2012 - Last updated on 30-May-2012 at 10:40 GMT

Premier Foods boss Michael Clarke is driving ahead with the group's 'power brands' strategy

Premier Foods is winning back City analysts' support under the direction of chief executive Michael Clarke, whose restructuring plans have restored their confidence.

Shore Capital analysts Clive Black and Darren Shirley last month welcomed the strategy Clarke was implementing with the assistance of recent Board level appointments.

They particularly welcomed his decision to grapple with the main issues of stabilising and improving Premier's trading position; reducing its debt which stood at £1bn at the end of 2011; and managing its huge pensions, inherited with the acquisition of RHM.

They said the refinancing deal agreed in March would give the senior management team the breathing space to restore the firm's fortunes, focusing on developing its eight 'power brands'. However, they argued that further disposals of secondary own-label brands, including bakery, on top of those already made would be necessary to reduce the debt burden.

Over the past year and a half, Premier has disposed of a number of businesses, including meat-free brands Quorn and Cauldron Foods to private equity buyers in January 2011, followed by the sale of its East Anglian canning business to Princes. More recently, it sold Brookes Avana to the 2 Sisters Group. Earlier this year, its Sarson's Vinegar and Hartley's Jam brands were put on the market.

Premier's eight power brands are: Batchelors, Bisto, Ambrosia, Hovis, Lloyd Grossman, Mr Kipling, Oxo and Sharwood's. The firm employs around 11,000 people at 43 sites, from Plymouth to Glasgow.

In its latest interim management statement, Premier reported that first quarter sales of £427M were up 1.3%, with its eight power brands growing by 3.7%. Clarke announced that its cost reduction programme was well underway and remained on track to deliver over £40M of overhead cost savings by 2013.

The 'power brands' accounted for around 70% of branded sales and profitability, and 50% of group revenues, said Black and Shirley. After a briefing with Premier's management, they announced that marketing spend had increased to £52M in 2012, compared with £26M in 2011. This was expected to rise to more than £80M by 2014.

Martin Deboo from Investec said the Q1 figures showed a return to positive organic sales growth for the first time in four quarters: "This is tentative but welcome evidence of a recovery, given that the Q1 comp doesn't reflect the harmful dispute with Tesco in Q2 FY11."

Deboo added: "This feels like a decent start to the new future and a reassuring quarter, albeit one that will have been anticipated by the market, given the positive mood music from management around the FY11 prelims, only last month."

However, Deboo expressed reservations about the strength of Premier's margins going forward.