After the meeting the new category management team, Shore Capital analysts Clive Black and Darren Shirley praised the firm’s sustained new product development, brand support and focused capital investment.
The combination was leading to “the return to volume growth and importantly debt deleverage”, despite tough UK food market trading, they said.
“Premier Foods is starting to unlock the potential from a more sustainable approach to both new product development and brand marketing support,” said Black and Shirley. “The visit highlighted the progress from Grocery across a growing number of brands and a building pipeline in the Sweet Treats division, which we expect to contribute over the medium term.”
Significant growth opportunities
The £20M investment in the Carlton facility promised to yield significant growth opportunities in the UK sweet treats market. Carlton in South Yorkshire is the largest of the firm’s three sweet treats factories.
Financial year 2016 will be an important year for Premier Foods, in which the manufacturer was expected to make further strong progress in cash generation and debt reduction, said the analysts.
“We forecast debt reduction of £153M over five years, equivalent to 46% of the current market valuation.” That offered significant potential for debt to equity transfer.
‘Premier’s major customers’
Premier was expected to achieve improving sales due to new product development, brand support and from an improving relative performance by the big four major multiples – “Premier’s major customers” – in a still tough UK grocery market, said Black and Shirley.
Premier sales on the up?
- New product development
- Brand support
- Improving performance by the big four
Shore Capital
The business also needed to inspire confidence in the sustainability of its relatively high trading margins. “While management talked of maintaining its grocery margins, it is targeting margin expansion in Sweet Treats, believing about 8% margins can build to double-digit over time,” they said.
The analysts also saw scope for modest rating expansion from “an undemanding” ratio of enterprise value to earnings before interest, tax, depreciation and amortisation multiple of 6.2x as investors’ confidence in the business builds. When the pension deficit was included the ratio was estimated at 7.8x.
Shore Capital repeated its ‘buy’ advice on Premier Foods’ stock.
The visit – hosted by Premier’s senior management – was arranged as part of an investor educational programme to highlight areas of the business showing operational improvements.
Meanwhile, environment secretary Liz Truss visited the Carlton site at the start of this month to open a £20M new production line at its Mr Kipling bakery.
The new production line – which create 80 new jobs – will more than double capacity of cake slice production at the South Yorkshire site.