Signalling a key vote of faith in debt-laden Premier Foods, leading City analyst Shore Capital has upgraded its advice on the firm's stock from 'hold' to 'buy'.
The Power Brands' ability to deliver continued sustained growth will be a key factor determing Premier Foods' fortunes, said Shore Capital
Shore Capital analysts Clive Black and Darren Shirley said Premier Foods' new stability in the hands of current boss Gavin Darby and his predecessor Mike Clarke had helped them overcome their "long-standing caution" about the manufacturing giant's prospects.
"While we struggled with the concept of this business right from the start, our worries deepened materially with the acquisition of RHM, which saddled Premier Foods with material debt and pension responsibilities," said Black and Shirley.
"Add onto this structural weakness a plethora of downgrades to operating profits and the rest is painful history for shareholders at the time."
While the arrival of Darby and Clarke had introduced more stability, the firm still remained "burdened by balance sheet pressures".
'Firmer grasp on the corporate tiller'
Nevertheless, profit warnings were a thing of the past and management "undoubtedly has a firmer grasp on the corporate tiller".
Premier Foods' profits would be influenced by three key factors, they predicted. Those were: the improved performance of categories and core brands, development of the secondary brands and improved productivity through the rationalisation of stock keeping units (SKU).
Topping the list was the continued gradual improvement in the performance of categories – savoury meals and sweet foods – and the Power Brands.
The brands – Ambrosia, Batchelors, Loyd Grossman, Mr Kipling, Oxo/Bisto and Sharwood's had posted six quarters of growth to mid-2013.
But developing secondary brands – such as Angel Delight, Bird's, Marvel, Paxo and Saxa – would also be a key factor influencing profits. Proprietary brands now account for more than 90% of grocery sales (ex-bread and milling), noted Shore Capital.
The third factor was improving productivity through selective rationalisation of its 1,700 SKUs and more general initiatives that support trading margins. The firm had already identified 600 SKUs for removal or reappraisal. And total operating efficiencies for the year were revised upwards by £10M to £30M, in Premier's half-year statement.
Shore Capital predicted the firm would make £145M of pre-restructuring trading profit for the year to December 2013. That was estimated to rise by 12.4% to reach £163M next year and by 10.1% to £179.5M in 2015.
"With the necessary disposal programme largely undertaken, management has a better capability to focus on the operating plan, while also calmly and collectively looking to materially bolster the group's balance sheet," said Black and Shirley.
They predicted Premier Foods will explore a mix of new equity and perhaps issue a corporate bond. "Bond yields have been rising in recent times, noting as we do the increase in government yields towards 3%. Such a move is a mixed blessing for Premier Foods in our view."
While the cost of corporate debt might be rising, the group's pension deficit of £303M in June 2013, with liabilities of £3.65bn, was likely to fall with rising government bond yields, said Black and Shirley.
So, "after the best part of a decade of caution", Shore Capital decided to update its share guidance.
Premier Foods is due to report its third quarter trading statement on October 31.
