Premier Foods could sell milling business next

By Mike Stones

- Last updated on GMT

Related tags: Premier foods, Hovis

Reassurance was needed about Premier Foods’ bread division, after it lost the lucrative Co-op contract to Allied Bakeries early this year, said Martin Deboo
Reassurance was needed about Premier Foods’ bread division, after it lost the lucrative Co-op contract to Allied Bakeries early this year, said Martin Deboo
The closure of Premier Foods’ Barry mill in the Vale of Glamorgan – with the loss of 43 jobs last week – and plans to reorganise its milling business into two parts could herald its sale, according to City analyst Investec.

Investec analyst Martin Deboo told FoodManufacture.co.uk: “Premier could either sell the third-party milling business – which is what ABF did to ADF 15 years ago ​ or sell the whole milling business.”

Closing the mill was “a very sensible thing to do”​ said Deboo. But the cash-strapped manufacturer was in danger of bearing the cost of rationalisation for the whole industry, he warned.

Nevertheless, “Gavin Darby ​[Premier Foods] is showing a bit of steel,”​ noted Deboo.

Speaking before the Barry mill sale, Deboo noted that Premier Foods was “getting medieval” ​towards its suppliers. “We understand that Premier has recently advised suppliers of an intention to move to ‘pay to play’ contracts. We see this as consistent with Darby’s stated intent to reduce complexity and our view that procurement savings are a material source of upside for Premier Foods.”

‘Share price torpor’

Deboo was cautiously optimistic about the prospects for the debt-laden food manufacturing giant and was mystified by its “share price torpor”.​ The equity had halved since the surprise departure of former ceo Michael Clarke and his replacement by Darby.

Premier Foods’ shares cheap were cheap but not outrageously cheap, continued Deboo. Input costs for the industry were flat or falling, while “the mood music from management was re-assuring”.

But Investec wanted Premier Foods to be able to demonstrate progress when its first half results are released next month relative to the previous year’s baseline of £633M of underlying sales and £32M of trading profit.

Early indications were encouraging with first quarter sales a modest 1% ahead of the same period of last year.

Also, Premier Foods’ management had committed to delivering £20M of savings, while the UK grocery environment was “a tad better”.

There was the prospect of better news too on pensions, with rises in bond rates relative to more muted increases in inflation expectations.

Lost the lucrative Co-op contract

But reassurance was needed about the firm’s bread division after it lost the lucrative Co-op contract to Allied Bakeries last April.

“Premier will now need to reassure that business has not been unduly disrupted. We expect the loss to reduce H1 ​[first half] sales by about £15M,” ​said Deboo. This represented about 5% of bread sales and 2% of group sales.

Last week Allied Bakeries’ parent company Associated British Foods revealed that the Co-op deal had helped its grocery division achieve 7% growth​ in the third quarter of its financial year.

Investec issued a ‘buy’ recommendation on Premier Foods’ stock but added that the first half results needed “to impress for the equity to regain its zip”.

The firm will post its first half results on July 23.

Meanwhile, Bob Spooner, md of the firm’s bread division and group supply chain director, said last week: “By creating a dedicated structure​ aligned to our Rank Hovis customers, we will be able to improve further our customer focus and service levels.

“It’s also critical that we take the tough decisions necessary to improve the longer-term profitability and sustainability of the milling business by aligning our capacity to market needs.”

Related topics: Bakery, Cereals and bakery preparations

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