Premier Foods update makes ShoreCap nervous but shares look undervalued
Previewing Premier Foods' third quarter results on Thursday, broker Shore Capital reiterated its 'buy' recommendation in light of the "truly awful" performance of the shares since March's refinancing despite the "much good work" done by management this year.
Premier Foods
149.60p
16:40 18/04/24
The food producer, owner of Bisto gravy and Mr Kipling cakes, has a market capitalisation of less than a third of its enterprise value, the broker noted.
ShoreCap was, however, approaching the trading update "with a degree of trepidation", given the weakness of previous trading and the UK's challenging grocery markets.
A stronger balance sheet and new pension schedule have boosted medium-term cash flow potential, while the bread joint venture (JV) with Gores reduces exposure to the challenged Hovis business and the Knighton JV in dry powders is expected to improve profitability.
Since the start of September, Premier has re-launched its Kipling cake range, advertised Homepride on TV for the first time in a decade and introduced new flavours and seasoning lines under the Oxo banner, supported by a step-up in media activity.
In light of the recently mild weather and new product launches supported by a step-up in marketing spend, analyst Clive Black expected a slower rate of decline than the second quarter.
He predicted group third quarter sales to fall by 3%-4%, with a significant lowering of commodity prices, together with cost savings and self-help measures keeping margins stable.
"Whilst we harbour concerns around near-term trading, we remain more comfortable with the sustainability of short-term margins," said Black.
"That said, if sales continue to fall at the rates evident in the year-to-date then it will be negative operational gearing that will have its way in the medium-term."
Black said the company needed to engineer a stronger sales performance, though he believes it will not come until the fourth quarter at the earliest.
He said he expected to shave full year 2014 trading profit forecasts but not make "structural downgrades", in which case the group's shares "appear to be substantially undervalued in our view".
"If we are correct in our assertions, and confidence can build that sales momentum can return to the group, then we see scope for a material re-rating as the valuation metrics are too low in our view; but to be clear a sustained improvement in the sales line is necessary for any stock price appreciation to be sustained."
Shares lifted 1p or 3.7% to 28p at 09:58 in London.