Panmure Gordon has downgraded its advice from “hold” to “sell” and warned that the crucial Christmas sales period may not spark the change in fortunes the beleaguered company is hoping for.
“A combination of weak consumer sentiment and retailers becoming ever more focused on price will not make things easy for new chief executive officer Michael Clarke to turn around quickly,” warned analysts Graham Jones and Damian McNeela. “We cut our price target from 22p to 2p, and move to a sell as at the moment we don’t see an easy way out for the company.”
The report is not quite as damning as the note issued by Exane BNP Paribas earlier this month, which set a target price of 1p after describing Premier’s third-quarter performance as “shocking”.
But Panmure Gordon is just as concerned about Premier breaching “at least one” of its banking covenants at the end of the year. “The number one priority for Premier is to agree refinancing, ideally extending the current facilities with more accommodating covenants,” Jones and McNeela said. “This is unlikely to be cheap.”
Panmure Gordon said the Hovis, Mr Kipling and Ambrosia producer’s total liabilities of £1.66bn, including debtor securitisation and pension liabilities, leave “very little value for equity investors”.
Premier has said it wants to focus on eight major brands, leaving the door open for disposals of other assets. But Panmure Gordon’s report said: “Whether Premier Foods can create a more viable balance sheet by selling off the least attractive bits of its portfolio seems questionable to us.”
There has been widespread speculation that own-label business Brookes Avana will be the most popular target for bidders, but analysts expect losses of over £20M for the full year in that part of the company.
Jones and McNeela said: “Brookes Avana must surely be number one on the list of disposals, but with operating margins forecast to be minus 11% this year it is not the valuable asset it once was.
They added: “Premier clearly needs cash, and possibly £500M could be raised in further disposals, but shrinking a business with large gross pension liabilities (£3.1bn as at June) can raise as many issues as it solves.”
Premier has recently engaged PricewaterhouseCoopers to handle its negotiations with banks, with the aim of resetting some of its covenants and potentially extending the terms of its loans.
At the recent supplier conference, Clarke acknowledged the tough trading conditions that existed across the industry but stressed his commitment to “building a business that is sustainable in the long term”.