Out of a group of 22 companies with a high level of indebtedness, problematic cash flows and a market value plus net debt above £1bn, three names stand out in the UK: Premier Foods (LSE: PFD), Balfour Beatty (LSE: BBY) and Enterprise Inns (LSE: ETI).
Premier Foods
Premier Foods’ financial and operational hurdles are rooted back to the days that preceded the credit crunch. The terrible decision to set its cost of debt at a fixed rate just before interest rates started to plummet determined a costly restructuring. That came at a time the UK retail sector had started to change beyond recognition.
Bad management and challenging market conditions have contributed to the decline of the food maker. Its equity value has been under strain even after October 2010 — when Premier Foods fixed its dreadful interest-rate swap trade — but most of the drop in its stock price has materialised this year.
Its latest restructuring is encouraging, but market conditions remain tough. Equally important, investors have lost patience with a company whose future is simply unpredictable. More equity has been injected and debt has been refinanced; unfortunately, there remain doubts that the business can be run properly in its current guise.
In the last four fiscal years, Premier Foods pursued divestments and reported aggregate losses of more than half a billion pounds. A reshuffle in its management team has done little to help. Premier Foods reminds me of a distressed mortgage whose equity value will continue to plummet.
Balfour Beatty
The builder is still in the middle of a corporate restructuring that will take time to yield dividends. While an upbeat view on the business led some analysts to suggest that 2013 could have been the year of “peak debt and trough earnings”, Balfour Beatty isn’t investable as yet.
The stock is down 17% this year. Most of the slump is dated 6 May, when the company shocked the market with poor financial figures, poor first-quarter orders, the departure of its boss and possible divestments.
Revenue and margins have been under pressure for four years now and there are no signs that Balfour Beatty has turned the corner. Forecasts for growth are muted, which is a major issue for a business that is burning cash fast. In the last three years alone, it recorded negative free cash flow of £650m. Its debts are high, and they cost the company about 50m a year in interest payments.
Enterprise Inns
The boss of the pub operator recently voiced his bullishness. Oh, well.
This is a business with interest expenses of more than £170m a year on revenue of £635m and operating profit of £292m. Its net leverage is above 8x and growth is unlikely to provide a helping hand in years to come. Quite simply, I’ve nothing else to add.
