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Premier Foods: ‘handle with caution’, says City

By Mike Stones , 22-Feb-2013
Last updated on 22-Feb-2013 at 11:06 GMT2013-02-22T11:06:49Z

New boss Gavin Darby has pledged to retain the power brands – the foundation of his predecessor's recovery strategy
New boss Gavin Darby has pledged to retain the power brands – the foundation of his predecessor's recovery strategy

Premier Foods’ full-year results for the year ended December 31 2012 divided City analysts but all agreed its debt mountain continued to give cause for concern.

Graham Jones, executive director of Panmure Gordon, said: “We struggle to see how Premier can materially improve its balance sheet after this year, given its heavy commitment to its huge pension deficit.”

Jones said the results were “below our expectations”, singling out the second-half performance of the bread division as being particularly disappointing ”. Its contribution fell by 48% to £26.9M.

Net debt was £23M higher than expected at £950.7M and its pension deficit “ballooned” from £212.4M to £352.4M, said Jones.

Panmure reduced its estimate of earnings before interest, tax and amortisation (EBITA) forecast to £141M from £148.4M. Growth would be driven mainly by savings in selling, general and administrative expenses.

“It is not earnings that matter for Premier but cash flow,” said Jones. “We struggle to see how Premier can  materially improve its balance sheet after this year given its heavy commitment to its huge pension deficit. We wait to hear from the new ceo, but it is absolutely crucial that this year Premier delivers its targeted cost savings to the bottom line.”

‘Still not for Granny’

Shore Capital shared the gloomy assessment. Under the headline “Still not for Granny”, its analysts Clive Black and Darren Shirley said: “The business has worked very hard to survive and provide itself options to deliver better times, but in a still challenging trading environment, commercial life remains a slog.

“While there may be some semblance of relief today as to the progress, nature, extent and underlying valuation of Premier Foods, alongside no dividend, means that we cannot be more positive versus its peers at this stage.”

But commenting before the company’s presentation to analysts, Black and Shirley said there may be scope to upgrade their estimates with about £20M of cost savings and low-digit growth in trading profit.

Trading profits

But cash exceptional items may be as high as £36M, they said. That suggested a provisional forecast of underlying trading profits of about £109M, representing 7% growth.

"Based on these forecasts, noting the still-high net debt: EBITDA ratios and the fulsome pension responsibilities, we retain a degree of caution on Premier Foods’ stock.”

Shore Captial retained its ‘hold status’ on the company.

Martin Deboo, analyst with Investec Securities, said the results were “a decent, reassuring statement in the light of the shenanigans [the surprise departure of ceo Michael Clarke and chief operating officer Geoff Eaton] that preceded it”.

But plenty of challenges remain. The trading environment remained tough and Premier Foods’ marketing investment remains low by peer standards, said Deboo. “And despite good work on disposals, leverage (including pensions) remains stubbornly high.

Deboo retained Investec’s ‘hold’ advice on the firm’s stock.

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