Premier Foods’s share price is ‘undervalued’

After meeting the manufacturer’s senior management team, analysts Clive Black and Darren Shirley concluded: “We believe that Premier Foods is making demonstrable progress in self-improvement across the board.

“That broad process makes the group's stock appear under-valued in our view, albeit we recognise the challenges of the UK grocery market in which the company operates and the still high levels of leverage [borrowing], which we expect to begin to fall in [financial year] 2016 and beyond.”

Premier Foods’s ceo Gavin Darby has had to undertake much “heavy lifting”, in order to knock Premier Foods into better shape.

Strong management team

A key element in that improvement strategy was the recruitment of a strong management team, with extensive experience in grocery and fast-moving consumer goods. That was allowing senior management to drive improvement across the group.

Another factor was its investment in production plants, designed to improve productivity and, through new product development and marketing initiatives, plant utilisation.

One example was the improved plant utilisation of the Carlton bakery in South Yorkshire, while there remained plenty of capacity across the group’s three bakeries.

“Premier has focused upon filling such capacity and pleasingly, this has been to good effect with some new private label volume in-tow,” said Black and Shirley.

‘Increased productivity in cake’

“As such the group is now seeing increased productivity in cake and it is on-track to achieve a double-digit margin from the Sweet Treats division and benefit from selective high return capital investment.”

Capital expenditure was set to remain at about £25M for the foreseeable future. Much of the investment will be directed towards replacing labour, ahead of the implementation of the National Living Wage, said the analysts.

Premier Foods had proved itself ahead of the game in rationalising stock keeping units (SKUs), in parallel with large store operators, who have sought to cut costs and so prices to offer a stronger value proposition against “the marauding limited assortment discounters”.

The manufacturer took 43% of SKUs out of its system in 2013/14, as it implemented its own simplification process, longer production runs and necessary enhanced productivity, said Black and Shirley.

Shore Capital retained current pre-tax profit forecast at £87.4M and earnings per share of 8.5p. The analysts estimated a net debt reduction of £142.7M from financial year 2015A to financial year 2020, equivalent to £191.5M

Shore Capital repeated its ‘buy’ advice at 34.8p on the manufacturer’s stock.

Premier Foods will issue preliminary results for the 52 weeks to April 2 on May‎ 17.