An Embarrassing About-Face For Premier Foods Plc

You won’t see many quicker reversals than the one from Premier Foods (LSE: PFD) this weekend.

A BBC Newsnight investigation, aired last Thursday, revealed that Premier Foods, the maker of Mr Kipling cakes, Bisto gravy and Ambrosia custard, has been requesting up-front payments from its suppliers if they wish to remain part of the supply chain, as part of a so-called “pay-and-stay” arrangement.

And some have been paying up — according to Newsnight, Premier has received millions of pounds this way.

The news was met with a barrage of condemnation, and Premier Foods’ share price took a bit of a battering — it closed Friday down 7% down at 33.5p, for a 56% fall over 12 months.

Change of heart

Now the firm has backtracked, with chief executive Gavin Darby saying that “Over the last few days it has become apparent that this mechanism has been widely misunderstood and misinterpreted“.

Well, no, Mr Darby, there was no misunderstanding or misinterpretation — in a letter to a supplier seen by Newsnight you had said “…we will now require you to make an investment payment to support our growth“, and plenty have actually paid up!

Still, he did at least say the company will now move towards “a more conventional type of discount negotiation“.

But all of this has served to highlight the precarious state of Premier’s finances, and the share price has slipped a little further today to 32.8p as I write.

In the half-year to 30 June, Premier managed to bring in a trading profit of £48.6m from continuing operations, which was actually slightly up on the £48.5m figure a year previously.

Massive interest payments

But over the same period, the firm had to stump up £30.8m in net regular interest — £20m of that being bank and bond interest. Net debt at the time stood at £572m, and that’s clearly a hefty burden — though at least it was down from an eye-watering £831m at the end of 2013.

And that’s the core reason Premier Foods had been trying to get up-front payments from its suppliers — it’s desperate for cash.

There’s a 50% slump in earnings per share forecast for this year, but analysts are expecting the slide to start to reverse in 2015, so could it be a good time to buy Premier shares now for a recovery? Well, they’re on a forward P/E of around 4, which is very low. But there’s no dividend being paid, and the bulk of the firm’s trading profit is going to pay the interest on its debts and doesn’t get anywhere near shareholders’ pockets.

Recovery on the cards?

But on the other hand Premier is in a highly geared situation, and if it can get its debts down significantly in the next couple of years, bottom-line cash for shareholders could recover very nicely.

Analysts’ recommendations are heavily on the Buy side right now, and we might soon be looking back on a nice recovery story here — but it’s too risky for me.

Could an investment in Premier Foods help power you to millionaire status? With a sensible long-term approach, you could do it!

Don't believe me? The Motley Fool's 10 Steps To Making A Million In The Market shows how a simple strategy followed over the long term can turn modest regular investing into a very significant cash pile. And it's FREE.

But hurry, as it won't be available for ever. Just click here for your personal copy today.

Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.