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 (EBITDA) of 4.9x for this year .
In a section titled ‘Kicking the zombie habit’, Jones estimated the ratio translated to about 4.1x on a banking covenant basis, which was inside its covenant of about 4.5x. “But we see the covenant tightening faster than Premier can keep up with and, by 2014, the headroom on your forecasts looks low again.”
‘Kicking the zombie habit’
With pension deficit contributions restarting next year, Panmure Gordon said it would be sensible for the company to think about another round of refinancing sooner rather than later.
Following Shore Capital’s prediction that Premier Foods would seek a refinancing plan within the next six to 18 months, Jones said: “We think a further equity raise (of around £200M) plus a corporate bond issuance could bring Premier back into the land of the living.”
Panmure Gordon reckoned “another slug of earning per share dilution” could be a price worth paying for “a rehabilitated balance sheet”. But it expressed concern that a further equity raise might lead to share price weakness in the near term.
A £200M equity raise would cut net debt/EBITDA from 4.6x for next year to 3.5x. But that would imply more than a one-for-one rights issue – given that the current market cap is £196M.
‘Crossing its fingers’
Premier Foods’ triennial actuarial review was expected to lead to a significant increase in the pension deficit – perhaps to £800–900M from £535M, said Pamure Gordon. “In reality this will not affect the cash contributions until H2 2016, by which time Premier will be gearing up for the next triennial review – and crossing its fingers that discount rates have normalised,” said Jones.
Taking into account disposals, Premier’s full year results and the continuing difficult trading environment in the UK, Panmure Gordon moved its earnings per share (EPS) forecast from 29.4p to 25.2p for this year.
It also revised its EPS for next year from 28p to 25.4p, when rising operating profits were expected to be offset by higher interest costs.
Premier Foods’ net debt was expected to end this year at £869M and remain at £863M by the end of next year. “While we think an equity raise and corporate bond issue is the correct strategy for the group, we are concerned that speculation surrounding this could lead to a further period of share price weakness,” said Jones.
Consequently the analyst moved its price target from 90p to 65p and changed its recommendation from ‘hold’ to ‘sell’.
Premier Foods chose not to respond to Panmure Gordon’s forecast.