Premier Foods — A more resilient business

Premier Foods — A more resilient business

Premier Foods’ H119 results demonstrate the business has become more resilient under the stewardship of outgoing CEO, Gavin Darby. Revenue growth of 1.0% in Q2 despite the hot summer was encouraging, and the UK relaunch of the Mr Kipling brand has clearly gone well. The news that Ambrosia may be sold suggests yet another step in the business transformation, although the price will determine the level of dilution and any change to net debt/EBITDA.

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Premier Foods

A more resilient business

Consumer

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15 November 2018

Price

37.65p

Market cap

£317m

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Share details

Code

PFD

Listing

LSE

Shares in issue

840.8m

Business description

Premier Foods operates primarily in the ambient food sector. The Grocery division operates in four main segments: Flavourings & Seasonings, Cooking sauces & Accompaniments, Quick Meals, Snacks & Soups, and Ambient Desserts. The Sweet Treats division comprises ambient cakes.

Bull

Q219 witnessed positive growth despite hot weather, unlike in previous hot quarters.

Mr Kipling UK relaunch clearly going well.

Batchelors continues to perform well.

Bear

Net debt/EBITDA remains high (3.9x at end FY18).

Logistics transformation programme undergoing operational challenges, which may affect H2 performance.

A hard Brexit would precipitate the need for stock building of raw materials, and hence up to £10m working capital affect in Q4.

Analysts

Sara Welford

+44 (0) 20 3077 5700

Paul Hickman

+44 (0)20 3681 2501

Premier Foods’ H119 results demonstrate the business has become more resilient under the stewardship of outgoing CEO, Gavin Darby. Revenue growth of 1.0% in Q2 despite the hot summer was encouraging, and the UK relaunch of the Mr Kipling brand has clearly gone well. The news that Ambrosia may be sold suggests yet another step in the business transformation, although the price will determine the level of dilution and any change to net debt/EBITDA.

No longer a winter business

Innovation has continued to deliver at Premier Foods, and has allowed revenue growth despite the unseasonably hot UK summer. The move towards greater convenience and an increased focus on products aimed at snacking continues to fit well with current consumer trends, and allowed Premier Foods’ products to stay relevant, even in the hot weather. In Sweet Treats, the relaunch of Mr Kipling led to excellent performance, with branded sales up 7% in Q2 in the division and Mr Kipling itself witnessing 13% revenue growth.

More disposals?

The company sold many brands during the tenure of prior CEO Mike Clarke, which helped to significantly reduce the company’s indebtedness. That said, not all disposals helped reduce the net debt/EBITDA figure, which remains elevated (3.6x at FY18). While disposals no doubt help to reduce complexity and more focus can be placed on the remaining businesses, clearly a lot hinges on the price that is ultimately agreed. In addition, management confirmed it is having conversations with the Pension Trustees, as any disposal proceeds from the potential sale of Ambrosia may be subject to a one-off payment to the group pension scheme.

Valuation: High debt levels contribute to discount

Premier Foods trades on 4.8x CY19 consensus earnings, which is a significant discount to its global and UK food manufacturing peer group and is due to its much higher level of debt than its peers. On EV/EBITDA it trades at c 7.6x CY19, which is still at a discount to its peers. The logistics transformation programme is undergoing some operational challenges that may affect Q3 revenues, but management’s profit expectations for the full year are unchanged. CEO Gavin Darby is due to step down at the end of January; although he leaves the business in far better shape than when he started, more recent controversies with major shareholders must have been a distraction.

Consensus estimates

Year
end

Revenue
(£m)

PBT
(£m)

EPS
(p)

DPS
(p)

P/E
(x)

Yield
(%)

03/18

819.2

78.6

7.6

0.0

5.0

N/A

03/19e

853.1

79.8

8.4

0.0

4.5

N/A

03/20e

872.1

85.5

9.0

0.0

4.2

N/A

03/21e

834.6

74.1

7.9

0.0

4.8

N/A

Source: Reuters I/B/E/S

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Sydney +61 (0)2 8249 8342

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison's solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are "wholesale clients" for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document.
A marketing communication under FCA rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a "personalised service" and, to the extent that it contains any financial advice, is intended only as a "class service" provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited ("FTSE") (c) FTSE [2014]. "FTSE(r)" is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE's express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Faroe Petroleum — Agar/Plantain discovery

Faroe Petroleum has announced the results of the Agar/Plantain exploration/appraisal well in licence P1763 (Faroe has a 25% interest in Agar/Plantain and 12.5% in the wider licence). The well encountered 20m of gross hydrocarbon-bearing reservoir with high net to gross ratio. Operator Azinor Catalyst estimates gross recoverable resources at 15–50mmboe, a volume expected to be commercial given available infrastructure. Assuming the partial de-risking of Agar/Plantain at mid-case 32.5mmboe (down from our pre-drill estimate of 79mmboe) to a 70% chance of commercial success would leave our RENAV broadly unchanged, but provides validation of our approach of including risked value for Faroe’s exploration programme, which made up 32.6p/share of our 185.2p/share RENAV in our recent initiation.

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