Hastings issues profit warning and Premier Foods celebrates Mr Kipling success

“Markets put in a much stronger showing at the end of the trading week with gains seen across Asia and Europe, extending a positive session seen last night on Wall Street where the main indices rose between 0.8% and 1%,” says Russ Mould, investment director at AJ Bell.

“The FTSE 100 advanced 0.4% to 7,637 on Friday as commodity producers, airlines and banks moved ahead. The rise in the miners may initially seem odd when looking at new figures which show China’s economy last year grew at its slowest pace in almost three decades. However, expectations were already low and the market continues to anticipate that the Chinese government will keep pumping money into stimulus programmes which could prop up demand for commodities."

Hastings

“At its heart insurance is quite a simple business, the aim being to secure more in premiums than you pay out in claims.

“And it is a surge in claims that is behind the profit warning and dividend cut from motor and home insurer Hastings today.

“A big challenge for the company is that motor insurance is a very competitive market and therefore, despite its best efforts to remain disciplined on pricing, it is very hard for premiums to keep pace with claims inflation. Regulatory changes haven’t helped either.

“Hastings arguably has greater sensitivity to rising premiums than some of its rivals as it wants to expand and use price comparison sites as its main method of distribution. People tend to make more use of these sites and do more switching of policies when their bills are increasing.

“To give management their due, they are seeking to manage the variables that are under their control by improving claims handling, boosting anti-fraud capabilities and launching initiatives to become more efficient and retain more business.

“However, until the motor insurance market turns it could be very difficult for Hastings to get out of first gear.”

Premier Foods

“The nation seems to have regained its taste for Mr Kipling cakes, judging by a 10% rise in this brand’s product sales in the 13 weeks to 28 December. That’s fantastic news for its manufacturer, Premier Foods, which has been desperately trying to dig itself out of a hole created by the sheer weight of its debt.

“Group sales are advancing with the 2.6% pace in the third quarter building on the 2.4% seen in the first half of its year. Importantly it is outperforming the market and has achieved 10 consecutive quarters of revenue growth.

“Premier Foods has previously been viewed as a company held back by its inability to invest properly in marketing and product development thanks to the burden of large debts and an underfunded pension scheme. However, it is now improving sales, profits and reducing debt under a new senior management team.

“Product innovation includes the roll-out of the Plantastic brand for vegan products, although it must be said this is already proving to be a very competitive marketplace. So many other food manufacturers and retailers are trying to jump on the vegan bandwagon that simply having a vegan product does not guarantee a sudden jump in earnings.

“Ultimately it looks like Premier Foods is regaining its mojo but at the end of the day the level of net debt is still very large relative to earnings, so the balance sheet issues still act as a restraint on the business. It also operates in a fairly low growth market, so Premier Foods needs to work hard just to take small steps forward.”

These articles are for information purposes only and are not a personal recommendation or advice.


The daily market update is written by Russ Mould, AJ Bell’s Investment Director and his team. The article highlights the movement in the main index, winners and losers on the day and any macro-economic announcements.