Premier Foods’s shares ‘undervalued after good Q1’

The analyst upgraded its ‘hold’ recommendation to ‘buy’, following its first-quarter trading update.

Premier Foods’s group sales rose by 1.9% in the 13 weeks to July 2 2016, prompting Shore Capital to upgrade its recommendation.

Analysts Clive Black and Darren Shirley said the £8M injection in marketing, and the deal with Nissin Foods Holdings Company agreed in May, made the manufacturer’s shares desirable to buy.

“We have reviewed the valuation multiples of Premier Foods shares and believe that the stock is too lowly rated at the time from a fair value perspective in absolute and sector relative terms,” said Black and Shirley.

In early trading yesterday (July 25), shares in Premier Foods were at 46.50p.

‘Further upside’

However, Black and Shirley said: “We believe that the stock can carry a valuation of 55p in the foreseeable future, [about] 18% upside, all things being equal at this time, with further upside if management’s plans are delivered.”

The deal with instant noodle manufacturer Nissin resulted in the Japanese company buying a 17.27% stake in Premier Foods. The agreement prompted Premier to raise its projected underlying annual sales growth to 2–4% from 1–2%.

Premier released its first-quarter trading update on Thursday July 21, and said it was on track to meet its optimistic sales targets.

Premier Foods ceo Gavin Darby said: “We are very pleased by the further improvement in our sales performance, which demonstrates four consecutive quarters of growth and continued momentum in the business.

‘Well placed to make progress’

“Given our strong brands and UK manufacturing cost base, we believe we remain well placed to make progress and our expectations for the full year remain unchanged.”

Premier’s branded sales were up 0.8% and non-branded sales ahead 9.8% in the first 13 weeks of the financial year. Grocery sales were reported to be 1.9% ahead, and sweet treats’ sales increased by 2%.

International sales grew around 5% in the quarter, largely prompted by strong sales in Australia, US and the Middle East.

Meanwhile, the UK’s decision to leave the EU is expected to have little impact on the company’s progress.

“Our category strategy of investing behind our brands continues to deliver results, despite the wider deflationary grocery market in the UK,” said Darby.

“While the economic environment is more uncertain following the EU referendum outcome, our immediate financial exposure is expected to be limited.”