Shares in Premier Foods (LSE: PFD) rose by almost 10% in early trading this morning, after the maker of Mr Kipling cakes and Ambrosia custard issued an upbeat fourth-quarter trading statement.
Premier said that its products had achieved their highest quarterly market share for four years, and that it expected to report full-year results in-line with expectations. That means adjusted earnings per share of 8.6p, putting Premier shares on a potential bargain P/E of just 4.5.
The good news
There’s no doubt that today’s announcement contained some welcome good news, which suggests chief executive Gavin Darby’s turnaround plan may be working.
Firstly, full-year profits will hit expectations. Accurate guidance is necessary to support any potential re-rating of Premier shares.
Secondly, sales didn’t fall as much in the fourth quarter as they did in previous quarters. Total sales fell by 5.3% across the whole of last year, but only by 4.6% during the final quarter.
Encouragingly, Premier’s marketing efforts may be working. Two of the firm’s key brands, Mr Kipling and Bisto, both managed to increase market shares and total sales during the fourth quarter.
The bad news
Premier reported today that net debt fell from £830m to £567m last year. This is good news, but it’s worth noting why this has happened. Premier raised £340m from a placing and rights issue during the first half of this year, virtually all of which was used to repay debt.
This meant that net debt fell from £830.8m to £571.9m during the first half of the year, but has hardly budged during the second half. Premier’s business is not yet generating anything like enough cash flow to repay its debts.
This massive debt load is costing Premier dearly. Net interest payments last year were £53.9m, nearly half the firm’s underlying trading profit of £131m.
Buy or sell?
For me, Premier’s debt is a millstone around the firm’s neck that will prevent any realistic prospect of dividends for the foreseeable future. The firm will face continued price pressure from its supermarket customers, and continual pressure on cash flow due to the cost of servicing its debt.
Premier deserves a low P/E rating because the firm is effectively under the control of its lenders. Until this starts to change, I can’t see any reason to invest in this firm.