Investec analyst Martin Deboo said: “Our feeling is that Premier and the rest of the bread industry are fairly short of wheat. So if current wheat prices persist through the harvest, we think the industry will push for a price increase in the early autumn.
“So Premier is probably looking at about an £8-10m cost hit in the fourth quarter of 2010, with the rest phasing in during full-year 2011."
He added: “The big question, of course, is how much of this Premier can recover and how quickly.”
In 2007 (the last time wheat prices went through the roof) the benchmark LIFFE wheat future price shot up from about £100/t to about £180/t, he said.
“The consequences for Premier were negative, with £8m of profit burnt in the second half of 2007 as bread price increases lagged cost increases.”
In 2010, prices have gone up from around £100/t in June to about £150/t now, he noted.
2010 vs 2007
However, Premier has argued “with some credibility” that it is not appropriate to compare the situation it finds itself in now with that of 2007, said Deboo.
For a start, the wheat price explosion in 2007 hit Premier within six months of the takeover of RHM, and now, by implication, it is much better prepared, he accepted.
Moreover, rival Warburtons enjoyed an unusual cost advantage in 2007 as the lower-than-normal premium for its Canadian wheat allowed bosses to delay a price move, said Deboo.
“Finally, Premier argues that Hovis’ brand equity is now much stronger, post its relaunch, than in 2007.”
That said, the “perennial big picture” was that Premier was a public company with a balance sheet problem and under-invested bakeries trying to compete with one private competitor (Warburtons) and another “arguably ‘quasi-private’ competitor" (Associated British Foods, which makes Kingsmill) in an industry with too much capacity, he claimed.
“What it adds up to is margin pain in our view and we think it’s appropriate to trim our forecasts for full year 2011 accordingly.”
Light at the end of the tunnel for Premier?
While Investec has been very vocal with its concerns about Premier’s management team, it was now becoming clear that there was “unlikely to be any change in the senior leadership team any time soon”, acknowledged Deboo.
“So, while we have expressed our reservations around [chief executive Robert] Schofield (pictured) and [incoming chairman] Ronnie Bell, this would appear to the settled reality for the foreseeable future.”
He also detected a ”growing resolve” to address the firm’s trading and financing issues and praised finance director Jim Smart.
“Smart continues to impress us and talks cogently on both financing and strategy/trading issues. There is now a clearly enunciated financing strategy in the round, and is an unequivocal and welcome declaration of intent on asset disposals."
Critically, Smart was "uncontaminated by the sins of the past and can accordingly act decisively and dispassionately", he argued.
“This doesn’t change the reality that Premier remains a company in crisis, but it does start to suggest to us that there is an improving probability that this crisis might one day be resolved.”