Interactive Investor

Stockwatch: this billion-pound business has real momentum

19th May 2023 12:13

Edmond Jackson from interactive investor

Up over 50% since the autumn to its highest since summer 2011, this company is in a far better financial position and its brands appear in most UK households. Analyst Edmond Jackson gives his view.

Strong annual results suggest mid-cap foods manufacturer Premier Foods (LSE:PFD) is avoiding the impact of a cost-of-living crisis and reports of producers having had margins hammered down by supermarkets. 

Performance figures for its year to 1 April are slightly ahead of guidance: both operating profit and revenue up nearly 12% to £1,006 million and £158 million, respectively, implying a very respectable 13% margin. 

This group is also UK-facing, deriving 94% of revenue here with the remainder split between Europe and rest-of-world. Its brands include a variety of staples, if hardly essentials: Ambrosia rice and custard, Angel Delight, Atora suet, Batchelors “light meal solutions”, Be-Ro flour, Bird’s custard, Homepride and Loyd Grossman sauces, Mr Kipling cakes, Paxo stuffing and OXO cubes. 

Conservative food habits and a relatively affluent populace 

Apart from occasional Bird’s custard in winter I do not buy any of Premier’s products. Why ever spend £3-4 on a small packet of sugary cakes when you could enjoy a far more nutritious banana slathered with pure peanut butter?  

Premier’s progress shows how British dietary habits are conservative around key items, despite modern advice to avoid processed food. The group has usefully expanded its spicier ranges; however, Brits stick to what they know and appreciate convenience. 

But if people are really hard up, they could ditch these items or buy supermarket own-brand. 

Besides a reminder of how food and drink can be a defensive investment, Premier’s resilience underlines how UK recession fears were overdone – at least for the first half of 2023.  

I would not, however, abandon “stagflation” concerns. Premier is another example how cost increases keep being passed on - here, with higher prices to shoppers, while a majority of people’s incomes are inflation-proofed. The dilemma is shown by the Bank of England warning only a few days ago how it will carry on raising interest rates if inflation proves stubbornly persistent.   

There comes a point where the economy is indeed liable to slow, also respecting the delayed effects of tighter monetary policy.  

A lower interest charge and taxation boost profit 

Premier’s 12% revenue advance is highly commendable given increase by most supermarkets in the last year effectively only cover inflation. This is chiefly like-for-like, the acquisition of The Spice Tailor, which makes curry meal kits, not being so material. 

Group profit dynamics are a tad complex, however. The result headlines focus on a similar 12% advance in “trading profit” to £158 million, yet £132 million operating profit is quite flat. Input cost inflation has been offset by savings and raising prices. 

Note three to the accounts clarifies this disparity as £21 million amortisation of brand assets, written off, also £11 million restructuring items and £6 million non-trading items. There is also a near £18 million credit from net interest on pensions. 

“Trading profit” thus approximates to EBITDA, where you take your view as to how representative that is of genuine profit. 

A 31% reduction in the net finance charge to £19.8 million has helped pre-tax profit rise 10% to over £112 million. With the tax charge also reducing, from 25% to 19%, net profit has leapt 18% to near £92 million. 

Net cash from operations eased 3%, however, to £87 million, tempered for example by a 33% movement on inventories and a 9% increase in the pension scheme contribution over £45 million. 

A 20% advance in the dividend to over 1.4p still looks very well backed versus a similar advance in statutory diluted earnings per share (EPS) to 10.4p. Yet while the price/earnings (PE) multiple appears fair to modest at around 13 times, a 1% yield is immaterial as support.  

I use the trailing numbers here because consensus on the current financial year to April 2024 is approximately flat performance; and even a 30% expected rise in the dividend to near 1.8p barely changes perception.  

That could be overly cautious given management says it has made a “good” start to the new financial year with “strong plans for product innovation, consumer marketing and capital investment.”  

Premier Foods - financial summary
Year end 2 April

Turnover (£ million)7908198248479479011,006
Operating profit (£m)61.569.36.595.3151131132
Net profit (£m)5.57.2-33.846.510677.591.6
Operating margin (%)
Reported earnings/share (p)0.70.9-4.05.412.28.810.4
Normalised earnings/share (p)
Operational cashflow/share (p)
Capital expenditure/share (p)
Free cashflow/share (p)
Dividend per share (p)
Covered by earnings (x)
Return on total capital (%)
Cash (£m)3.123.627.81784.254.364.4
Net debt (£m)523496470430333285261
Net assets (£m)7939499631,6801,1841,5071,406
Net assets per share (p)95.2113114198138175162

Source: historic company REFS and company accounts

Chart context implies another bull run is under way 

More positively – if you respect market technicals – Premier is currently trending well. 

At around 130p it is well down on a 2007 high over 1,800p – a high achieved after the fateful 2006 acquisition of Rank Hovis McDougall for £1.2 billion, where debts crashed the stock below 20p. 

From around 2014 it spent five years in a 30p range; then the appointment of a new CEO in 2019 coincided with Covid lockdowns revising lifestyles around eating from home. 

A re-rating thus began from the wider market sell-off in March 2020, Premier soaring from 20p to 85p by that July, sustaining a range mostly over 100p until last September’s drop to 95p, associated with the disastrous UK mini budget. This has helped set up another stock-climb where 130p was last seen in 2011. 

On a technical basis, therefore, it could reasonably be said the frustrated long-term holders are out and buyers are responding to the notion of food as a defensive investment. 

Encouragingly for shareholders, branded revenue rose nearly 15% in the final quarter – the first quarter of calendar 2023 – just when the cost-of-living crisis was supposedly tightening post-Christmas spend. For the financial year as a whole, branded revenue rose by over 9%. 

My reading is of risk/reward becoming increasingly finely balanced given the possibility that interest rate rises do force consumers to look for greater savings. I am poorly placed to anticipate behaviour toward Premier’s foodstuffs, however, as I just would not buy. 

Five-pillar growth strategy continues 

My sense is this having existed for a few years but at least the financial summary table shows performance has re-rated since the impact of Covid. 

In summary: Premier wants to keep growing the UK core business, which has a three-year average growth rate over 5%, expanding into new categories. Sales of plant-based products such as Plantastic cooking sauces, protein pots and Millionaires Flapjacks, rose 34% last year. Supply chain investment will continue. International business will be developed in target markets of Ireland, Australia and New Zealand, the US and Europe. Lastly, “inorganic opportunities” via acquisitions which started with The Spice Tailor and saw its 12-month revenue up 25%.  

Such marketing appears sound, extending from well-established staples into plant-based also spicier foodstuffs as British society becomes increasingly diverse. I cannot however envisage a radical breakthrough to leverage sales.  

More a defensive than growth or yield stock

Wage increases mean people can so far afford what are to me, non-essential “staples”.  

Dividends ought to improve but a mid-single-digit yield could take a few years. Annual pension contributions over £40 million are shown in note eight to the accounts, despite a three-way merger of pension schemes in 2020, said to vastly improve their funding. More positively, cash costs will reduce by £6 million from the current year to April 2024 and the net present value of total pension cash contributions is down to £125 million. 

Premier Foods is therefore in a much better financial position nowadays. However, it remains significantly a play on Britons continuing to pay for Mr Kipling and the like. Hold. 

Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.


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