Exceedingly good brands, damaged company

New management is dealing with Premier Food’s onerous debt, but they only have a two year window in which to turn the company around or it may no longer be making exceedingly good cakes.

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Premier Foods owns some of Britain’s best known food brands, including ‘power brands’ Mr Kipling, Ambrosia, Sharwood’s, Loyd Grossman, Bisto, OXO, Batchelors and Hovis. It also manufactures non-branded food for retailers.

bargain / recovery / cyclical / stalwart / growth

In the words of its new managers, the company they run is “complex and unfocused“. It was assembled from debt that could not be sustained after the credit crunch and now constrains the company.

Expectations – focus

Premier is focusing on eight power brands responsible for 68% of branded sales, which it believes have greatest scope for development, while reducing costs and selling off some of its lesser brands, including Branston, Hartley’s, Homepride, Bird’s, and Mother’s Pride. It has little choice, disposals are mandated by its lenders, who have prohibited dividends and limited capital expenditure. What money Premier has to invest is going on IT systems, TV advertising, promotions and developing new products like Hovis Farmer’s Loaf and diamond Jubilee Mr Kipling cakes.

Threats

competitive position ' weak
The latest annual report, to December 2011, describes a company losing ground because it cannot afford to market its renowned brands while paying the interest on its debts. Its competitive position could, therefore, be improved by reducing its debt.

customer relationships ' weak
Last year Tesco retaliated against price rises by temporarily removing Ambrosia, Batchelors, Loyd Grossman, and Sharwood’s products from its shelves and there have been similar disputes in the past. Premier plans to improve relationships with customers by developing joint business plans instead of its earlier and more adversarial approach.

management ' promising
Michael Clarke was appointed chief executive in July. He is a former president of Kraft Foods Europe, and before that Coca Cola. Mark Moran, chief financial officer, came from SSL, now part of Reckitt Benckiser in December.

Although they haven’t been running the company long, their time spent with big brands is impressive, their plan is clear, and they’ve completed the refinancing. Moran’s committed to the company, he owns shares worth about ''2.6m.

finances ' weak
In March, Premier came to new terms with its lenders that last until 2016, with some breathing space built in until 2014. Until then, part of the debt bears no interest and the pension scheme has deferred deficit repayment contributions (normal contributions continue). After 2014 the interest rate goes up too.

Overall the company’s debt, including operating lease commitments and the pension deficit amounts to 126% of tangible assets, which is, frankly, scary.

valuation ' speculative
Premier’s net tangible asset value is negative. Factoring the debt into the market value makes puts it on a 7% earnings yield based on its eight year record, which makes it look expensive.

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Verdict – a gamble

The value of the brands are unknowable but the debt load is certain. Instinct tells me Premier is probably undervalued under new management. I like the commitment to sustainability and partnering with customers and, if Premier can sort out its finances, it should become more competitive.

But if the company doesn’t pay off its debts fast enough from increasing cash flows it could go bust.

The shares have risen lately, but I won’t be adding Premier to the Thrifty 30 until business performance improves. It’s current F_Score of just two (out of nine), indicates it’s still in trouble.

Notes

• Premier Foods website
• The Grocer: Delistings by Tesco push Premier into profit alert
• My template for a recovering company
• Premier Foods’ history, including acquisitions and disposals
• Mark Moran joins in December: “There’s no silver bullet“
• More about Premier Foods
• My Premier Foods worksheet (2 pages)
• How I calculate the earnings yield
• The Thrifty 30