One of Shares 2023 Tips of The Year, Mr. Kipling, Bisto, Sharwood’s and Ambrosia brands owner Premier Foods’ (PFD) stock is up 11.5% year-to-date, extending five-year gains to nigh-on 190%.

Ravenous investor appetite for the shares in recent years reflects the considerable progress made in reducing debt and resolving its pension issues, as well as the consistent growth from its brands and cycle of forecast upgrades served up under the stewardship of CEO Alex Whitehouse, not to mention a welcome return to the dividend list after a lengthy absence.

The FTSE 250 food maker has repaid our faith with a positive return this year thanks to strong full year results (18 May) showing trading profit growth of 11.5%, ahead of upgraded guidance. Premier Foods followed this up with a robust first quarter trading update (20 July), which revealed a 21.1% rise in group sales with core brands like Batchelors, Bisto and Oxo taking further market share as consumers cook more at home to keep costs down.

Significantly, Premier Foods also said it believed recent high input cost inflation was ‘past its peak’, meaning it had no need to raise prices again this year. And with the quarter’s strong sales momentum set to continue, full year trading profits should be at the top end of market expectations.

Broker Numis recently argued Premier’s combination of ‘strong brands, well defined domestic and international growth opportunities and a proven track record in innovation and execution should sustain this growth momentum’. We believe the grudging prospective price-to-earnings (PE) ratio of sub-10 times represents excellent value in this context.

RESONANCE AND RELEVANCE

Premier Foods is one of Britain’s biggest food producers, employing 4,000-plus people operating from 15 sites across the country and supplying major retailers and foodservice customers with iconic brands found in millions of homes every day. So Shares jumped at the opportunity to discuss the business with its busy CFO Duncan Leggett.

He says Premier Foods’ competitive strengths include its ‘great portfolio of established and well-loved brands that have got a lot of resonance and relevance, particularly with the UK consumer, but increasingly overseas.

‘We’ve been employing what we refer to as our branded growth model - making sure we invest behind our strong brands and in emotionally engaging advertising with the consumer, and that we execute brilliantly with our retail partners.’ Being a branded fast moving consumer goods (FMCG) company has been the ‘heart of our success over the years, certainly from a commercial perspective,’ he explains.

REMOVING THE OVERHANG

‘There’s a been a lot of history around Premier Foods and its levels of debt and pension fund obligations,’ concedes Leggett when quizzed on the balance sheet. But he stresses leverage has been brought under control, with Premier Foods paying debt down increasingly each year over the last few years. ‘And we did a transformational refinancing in 2021 which significantly reduced our cost of debt and fixed it for quite a few more years as well,’ he points out.

In March 2020, Premier Foods entered a merger agreement for its two pension schemes, which are now managed by the same trustees. The current NPV (net present value) of deficit payments is around £125 million, roughly half what it was last year, and management are targeting full resolution of the pension deficit within three years. Not only would this boost the company’s free cash flow generation, but it would also remove an overhang for the equity story.

‘We think about three years is a reasonable timeframe to effectively solve Premier’s longstanding pension challenge,’ continues Leggett. ‘And if we can get £40 million of free cash that we can invest behind the business, that’s pretty exciting.’ As for Numis, it thinks that ‘a final resolution of the pension issues could trigger a further re-rating in the shares’.

BROAD-BASED GROWTH

Numis notes that over the last three years, Premier Foods has achieved 5.3% average annual growth from its branded UK business. ‘The underlying trend towards increased at-home meal consumption has been positive but the company has also successfully navigated a number of challenges including mitigating substantial cost pressures and increased competition from private label’, says the broker.

Leggett informs Shares that Premier Foods’ model is to have ‘an NPD (new product development) pipeline behind every brand and we invest, albeit proportionately, behind every brand to generate growth.

‘We’ve got an innovation pipeline from everything from Mr Kipling, one of our biggest brands, down to Angel Delight, which is one of our smaller brands.’

The company’s growth has been reassuringly broad-based over the last few years, stresses Leggett. ‘You can see from last year’s results that brands like Batchelors grew over 20%, proving very relevant with the environment we’re in, and we continue to see market share gains pretty much across our grocery category and brands.’

Premier Foods’ balance sheet rehabilitation has allowed the company to identify and launch several new product innovations by taking existing brands into adjacent categories. The most successful example to date has been the launch of Ambrosia porridge pots, which target the breakfast and snacking category, while other examples include ice cream under the Ambrosia and Mr. Kipling brands as well as Oxo marinades.

BRANDS WITH RICH HISTORY

Premier Foods’ portfolio of household brands has a long history with the oldest, Bird’s custard powder, dating back to 1837, the start of Queen Victoria’s reign. The genesis of today’s Premier Foods business was the creation of Hillsdown Holdings in 1975.
The business listed on the London Stock Exchange in 2004.

The Grocery division is Premier Foods’ largest, accounting for 74% of revenue in the year to March 2023, with Sweet Treats accounting for 26%. ‘Revenue is principally generated from its Branded activities which represented 87% of revenues last year,’ explains Numis. ‘At a divisional level the split between Branded and Non-Branded is broadly consistent with brands accounting for 85% of Grocery sales and 80% of Sweet Treats.’

THE BEST RESTAURANT IN TOWN

‘Clearly, this is a really difficult economic environment,’ says Leggett. ‘We try and stop the inflation happening in the first place through hedging and procurement strategies. We offset everything we can through our efficiency programmes, particularly in our supply chain and in our factories.’ And despite raising prices as a last resort to offset inflationary pressures, Premier Foods served up ‘pretty good growth last year and again into quarter one this year, our brands are still performing really well’.

Premier Foods created the ‘Best Restaurant in Town’ marketing campaign aimed at getting people to recreate affordable restaurant style meals at home. ‘One of the roles that we’re trying to play is to help inspire consumers,’ insists Leggett. ‘Because our products are great components of affordable meals and the Best Restaurant in Town is trying to equip consumers with a few more ideas about how to use our products to create meals for £1.25 a portion or whatever it may be.’

RECIPE FOR OVERSEAS GROWTH

Leggett says international is ‘absolutely one of the key pillars of our strategy and we see three brands as having global potential’. These are Mr Kipling, cooking sauce brand Sharwood’s and also, The Spice Tailor, the Asian meal kit business acquired for £43.8 million last year in a deal marking Premier Foods’ first acquisition in 15 years.

Premier Foods’ international footprint is now mainly based in Ireland and Australia and ‘we’ve got a bit in Europe and in North America,’ says Leggett. ‘Mr. Kipling is going great guns in Australia, where market share is at an all-time record high. We’ve really established the market leader within branded cake from a relatively standing start over the last six or seven years,’ he explains.

Admittedly, America has proven to be a graveyard for many British brands down the years, but Mr Kipling was recently launched in the US through a successful test in Target (TGT:NYSE) stores, and the brand’s distribution has expanded across the pond since.

As for The Spice Tailor, Leggett insists the brand has a ‘great repeat rate’.

‘Try it and you are pretty likely to want to buy it again. Spice Tailor was growing at 20% before we bought it and last year, we increased the growth rate to 25%. We’ve gained distribution in the UK, Ireland and North America already, so it is all very much going according to plan.’

ACQUISITIONS BACK ON THE MENU

Following its success with The Spice Tailor, Premier Foods plans to undertake further M&A and Numis reckons the company has roughly £200 million of potential firepower for acquisitions.

‘We are absolutely on the lookout for something else that we could apply the model to,’ says Leggett. though he stresses management are selective both in terms of the brands they target and the price they are willing to pay in the interests of maintaining discipline. ‘But we definitely see potential for bolt-on deals to help step-change our growth rate,’ he adds.

With consumers increasingly seeking to improve the nutritional content of their diets, manufacturers are focusing on removing calories, sugar, salt and fat from their products and Premier Foods is playing its part. Examples include its range of Mr. Kipling ‘Deliciously Good’ cakes and pies, classified as non-HFSS (non-high in fat, salt and sugar). ‘We completely buy in and work constructively with government and regulation bodies on what they choose,’ says Leggett. ‘Part of our strategy is to offer healthy options and healthy choices across all of our portfolio, we very much believe in offering the consumer choice and healthier options.’

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