Shore Capital analysts Clive Black and Darren Shirley said: “Management now has the opportunity, for the first time in many years, to focus on driving ‘category growth’ within its streamlined, high-margin portfolio.”
The analysts predicted growth in the sales of Premier’s key power brands – Mr Kipling, Ambrosia, Sharwood, Loyd Grossman, Bisto, Oxo and Batchelors – would rise by 2.5% in financial year 2014. Growth was expected to climb to 3% in 2015 and 3.5% in 2018.
But the growth of the supporting brands would be lower – forecast at 0.5% in 2014 and building to 1% in 2016.
Own-label sales predicted to fall
Premier Foods own-label sales were predicted to fall by about 1% each year as the business focused on driving branded sales harder.
The impact – along with improved productivity and streamlining of stock keeping units – would be a modest lift of five basis points in earnings before interest and tax (EBIT) each year over the next five years. That would translate to annual EBIT growth over the five-year forecast period from 16.75% in 2014 to 17% in 2018.
Shore Capital predicted a compound annual growth rate in earnings before interest, tax and amortisation (EBITA) of 2.8%, from £139M this year to £159.3M in 2018.
Debt was expected to be stable this year. “We expect broadly flat debt through 2014, forecast at £509M at the year-end, down from £513M,” said Black and Shirley. That reflected about five months of the former pension schedule, a £30M one-off increase in working capital, offsetting a £28.7M benefit from the Hovis transaction and a £20M investment in Mr Kipling packing capability.
Next year was expected to be a strong year of debt reduction, with the new pension schedule, a capital expenditure rate of 1.1x depreciation and more neutral working capital movements.
Free cash flow yield was forecast to be in the low double-digit range from next year.
Shore Capital issued ‘buy’ advice on Premier’s stock.
Meanwhile, Premier Foods said the refinancing deal “will liberate the firm from its past”, when it released details early last month. See below for Shore Capital’s assessment of the key points of the refinancing deal.
News of the restructuring deal came alongside news of 18% growth in trading profit for the firm’s full-year results for 2013.
Refinancing deal key features
• The new pension schedule that will reduce deficit contributions by £161M over the six years between 2014–2019. That will involve a £35M payment this year falling to £9M in 2015 and then rising to within an annual range of £42–50M from 2016–2019.
• £353M equity raise, comprising a fully underwritten £100m placing at 130p and a fully underwritten eight for five rights issue at 50p to raise £253M.
• £500M of senior secured notes in two tranches.
• £272M revolving credit facility with a five-year tenor and initial interest rates of LIBOR plus 3.5% from a streamlined syndicate of seven banks, compared with 28 previously. Premier Foods has significant debt maturity through to 2019, providing a five-year window through which management can focus on its operations.
Source: Shore Capital