Premier Foods delivers ‘awful’ stock performance
The firm’s shares have tumbled by more than 71% since March, noted Shore Capital analysts Clive Black and Darren Shirley. That delivered a market capitalisation of £226M – just 29% of the enterprise value.
Four factors accounted for the markdown in Premier Foods’s share price, they suggested. First, the scale of equity fund, which at more than 100% of market capitalisation will have satisfied prevailing market demand and limited short-term investor interest.
Of particular concern
Second, Premier Foods’s trading updates so far this year have been poor, with the 6.3% fall in second-quarter revenues of particular concern.
“That management suggested warm weather was a prime factor behind the sales fall was perhaps met with a degree of concern by the investment community,” said Black and Shirley. “In the third quarter the UK saw a cooler August but a warm September. Accordingly, with the negative surprise of the second quarter in tow, there are understandable concerns about Premier’s sales third-quarter momentum.”
Third, the UK grocery environment had hurt sentiment towards Premier Foods, albeit in a more focused manner than for the rest of the supply trade. Many potential investors were deterred by the challenges the firm faces from limited assortment discounters and high street value retailers plus the sustained market share losses and margin compression of the superstores – Premier’s key customers.
Fourth, investors will also have been put off by a series of downgrades despite management’s prediction (July 22) that, assuming normal weather patterns, second-half branded sales would improve, leading to unchanged trading profit expectations for the year.
“Despite such comments, we nudged down our forecasts at the interim stage and there have been a number of further market downgrades …”, said Shirley and Black.
‘Much good work’
But the analysts praised what they described as “much good work in 2014”. They singled out the £353M equity raise, a much simplified refinancing package – with £500M of senior secured notes, a £272M revolving credit facility and new pension schedule strengthening the balance sheet and medium-term cash flow potential.
The creation of the joint venture with the Gores Group reduced Premier Foods’s exposure to the challenged Hovis business and the Knighton partnership in dry powders should improve profitability and secure the future of the facility.
The analysts also noted the recent strengthening of the management team, with Alex Whitehouse becoming md of the newly created grocery business unit and Graham Hunter appointed md of Sweet Treats.
Black and Shirley predicted further sales contraction in the third quarter but with a slower rate of decline than in the second quarter. “Premier does need to engineer a stronger sales performance, though we believe it is likely to be in the fourth quarter of 2014 at the earliest.
“Also, it was the 2015 sales performance, in particular, that will determine the group’s share price trajectory rather than near-term performance.”
Shore Capital repeated its ‘buy’ advice on the firm’s stock.
Premier Foods is expected to announce its third quarter trading results on Thursday October 23.
