After meeting the firm’s management in Liverpool last Friday (March 22), Shore Capital analysts Clive Black and Darren Shirley, made the prediction in a note entitled ‘Lifting the millstone’.
“The scale and form of any potential fund raise remains to be seen, though Shore Capital envisages a mix of debt, in the form of a long-term corporate bond, and possibly new equity," said Black and Shirley. The aim would be to "transform the balance sheet; maybe raising £450–600M in total, permitting the consolidation of its funding banks on more normal industry terms”.
Also, with the UK grocery market suffering its third successive year of negative volumes, any revenue growth was likely to come from price, promotions and brands with leading market positions.
‘RHM: Really Harmful Merger’
The analysts said Premier had endured a decade of challenge starting with the acquisition of RHM, which they tagged “Really Harmful Merger”. The original idea of building a portfolio of proprietary brands, which concentrated on the UK and mainly the ambient temperature zone, was promising, they said.
“However, the execution of the strategy left more to be desired, most particularly the acquisition of RHM, which fundamentally changed our perspective of the company, leading us to be cautious for most of the stock’s history,” said Black and Shirley.
The enduring legacy of the deal has been the challenges of coping with “the debilitating level of indebtedness and the massive pension responsibilities”.
The analysts said:“Those burdens have led to one emergency refinancing and equity issue, further protracted bank negotiations and an aggressive disposal programme, which has seen the group significantly exceed the £330M bank agreed target proceeds, well ahead of schedule.”
Shore Capital estimated the firm’s net debt for the year to December 2013 at £849M. That reflected a year-on-year reduction of about £100M fuelled by the proceeds of forced disposals amounting to about £90M.
They forecast earnings before interest, tax, depreciation and amortisation (EBITDA) to rise to £200M and beyond.
End of the pension holiday
Also, the end of the pension holiday – from January 1 2014 – and the expansion of debt margins and fees from this December would lead to only modest organic debt reduction on an annual basis. They forecast a £47M reduction in 2015 to £774M, gearing of 162% and a debt/EBITDA of 3.6x.
“As such, we remain of the view that Premier Foods is not going to structurally reduce debt in the medium term through a focus on its operating performance, and that indebtedness will weigh down on the group's stock rating potential,” said Black and Shirley.
Consequently, life was likely to remain “a slog” for Premier Foods, compounded by the surprise departure of former ceo Michael Clarke.
But the firm continued to have “balance sheet restrictions” that dominated the business, regardless of who was in charge and its trading strategy, they said.
Unlike many of its mid- and small-cap UK consumer peers, Premier Foods shares do not offer an income stream and is unlikely to offer one anytime soon, said Black and Shirley.
Shore Capital offered a ‘hold’ recommendation on Premier Foods' stock.