The Mr. Kipling cake maker has positive momentum, but it also carries a mountain of debt
Thursday 23 Jan 2020 Author: James Crux

Despite tough domestic grocery market conditions, Mr. Kipling-to-Bisto maker Premier Foods (PFD) has now delivered 10 consecutive quarters of sales growth in the UK. The shares have had a good run since November 2019 but the company is still saddled with a reputation as a corporate ‘zombie’ due largely due to its massive debt pile.

UK sales grew by 3.6% in the third quarter. Biggest brand Mr Kipling proved the star turn, although seven of Premier Foods’ eight largest brands have grown market share.

There should be a marked increase in cash generation should earnings increase and finance charges reduce (as forecast by analysts), supporting higher marketing spend behind its brands, in turn potentially driving further sales and profit growth.

Premier Foods’ more predictable cash generation is providing funds for much-needed new product development, including a move into plant-based products, but more importantly, for paying down debt.

The food producer has spent the past decade trying to resolve its debt burden and pension deficit. A new management team led by Alex Whitehouse (CEO) and Colin Day (chairman) expects the net debt-to-EBITDA ratio to reduce to 3 times by March 2020, after which Premier Foods could start paying dividends.

A stubbornly high net debt pile, £492.9m as at 28 September 2019, plus pension responsibilities, are the collective millstone around Premier Foods’ neck. This overstretched balance sheet has long-constrained Premier Foods’ ability to market its brands, prevented dividend restoration and acted as a poison pill for potential suitors. That said, takeover offers from US spice giant McCormick & Co were spurned in 2016.

Peel Hunt forecasts adjusted pre-tax profit growth from £77.7m to £82.7m for the year to September 2020, ahead of £87.4m in 2021 and £94.5m in 2022. Based on this year’s 7.5p earnings per share forecast and a 36.75p share price, Premier Foods trades on a very low price-to-earnings (PE) ratio of 4.9. This discounted rating prices in concerns over shifting that sizeable debt mountain.

Additional fodder for bears include subdued consumer spending and input cost inflation, not to mention the growth of the discounters, a part of the grocery market where Premier Foods is less represented compared to the big supermarkets.

The company is soon expected to announce the results of strategic and pension reviews. This might involve selling one or more of its key brands, although Peel Hunt doesn’t believe it has received an approach at an acceptable price so the review outcome might simply be to keep everything.


BULL POINTS

Market leading brands

Improving cash flow generation

Overseas growth scope


BEAR POINTS

Onerous debt and pension obligations

Subdued grocery market

Competition from private label suppliers/rival brands

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