Analyst Nicola Mallard boosted Premier’s profits before tax forecast by 3% but cautioned: “We would like to see further evidence of this [improving profit] progress at least being maintained.”
The upgrade in profit forecast gave rise to a higher target price of 51p and prompted Mallard to upgrade Investec’s recommendation on Premier’s stock from ‘hold’ to ‘buy’.
Premier delivered a trading profit of £131M in line with Investec forecasts of £130M. “The overall sales trends were broadly as expected, with declines across the three old segments to give -4.5% in total,” said Mallard. But that was mainly the result of difficult trading between April to December 2014.
More encouraging trends
The past quarter (January to March 2015) showed much more encouraging trends, said Mallard.
Stepping up investment in innovation and marketing appeared to be paying off, with some good uplift in cakes, flavours and seasonings driving both the total category and its share growth, she added.
Marketing investment in the second half was 82% ahead, but margins were broadly held as that cost was funded from an improved gross margin.
The balance sheet closed the year with £585M of net debt, representing four times earnings before interest, tax, depreciation and amortisation (EBITDA). But that ratio should fall to about 3.6 times this year, based on reduced capital expenditure and pension costs, said Mallard.
Investec increased its forecast on trading profit by 2% for the 2016 financial year and profit before tax prediction by 3%, reflecting improved sales trends in the four quarter.
“Rather than expecting revenue/trading profit to decline, we now expect modest increases, compared with financial year 2015,” concluded Mallard.
In the financial statement accompanying Premier’s results on Tuesday June 9, boss Gavin Darby defended the firm’s controversial Pay-to-stay investment plan. While acknowledging mistakes in its implementation, he said the programme had been successful overall in helping to halve its supplier base.