In a note published this morning exploring the strategic questions facing Premier, Investec Securities analyst Martin Deboo said:“As Premier laps the anniversary of the resolution of its financing crisis, with the resultant focus on organic profit growth, the consistent evidence is that such growth is not being delivered.”
He added:“Independent of trading, the verdict of the share price would seem to be that the market has lost confidence in Premier’s leadership. Investor confidence is zero and urgent action is needed to restore it, in our view. We think that chief executive Robert Schofield’s position is becoming untenable and expect a formal review process to take place.”
Premier Foods' first quarter figures had not inspired much confidence, he said.“Yes, sales performance in branded was ahead of our (downbeat) expectations. But group sales and profit growth in the first half are set to be negative, in what should have been something of a (relative) purple patch for Premier.”
Meanwhile, turning things around in the second half was not going to be any easier, he claimed:“First half profits are being guided to be down year-on-year and delivery of consensus is therefore dependent on a turnaround in the second half, when Premier will be battling the commodity cost inflation that has proved to be its undoing in the past.”
‘Zombie’ company or ripe for a turnaround?
Investec's note outlines four possible scenarios for Premier: ‘Freefall’ – in which trading continues to decline and no action is taken to sell assets or change the senior management; ‘Zombie Company’ – in which “trading flatlines but Premier stays within its covenants”; ‘Rapid takeout’ – in which Premier’s low valuation flushes out a buyer (private equity or possibly Associated British Foods); and finally, ‘Turnaround’ – in which management is overhauled, trading improves and disposals are made “at decent prices”.
Were Premier’s low valuation to attract a buyer, this would “most probably be a financial buyer, predicted Deboo: “We see a trade buyer as less likely, but wouldn’t rule out Associated British Foods if it can find a solution to any resultant concentration issues in bread.”
Despite strong share gains and profit growth on the back of the Hovis relaunch, returns in Premier's bakery division remained low, he noted, while management had arguably failed to return much of the benefit of much lower wheat prices to the bottom line. "In the core business of plant bread, we think that Premier is much less profitable than Warburtons and less profitable than Allied Bakeries.”
He added:“We continue to worry about what we see as industry over-capacity, the expansion of Warburtons and the cost-led aggression of ABF.”