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Premier Foods raises bread prices

Created:
13 November 2007
Written by:
Nathalie Olof-Ors

With its trading update this week, Premier Foods - the UK's largest food producer - announced that group sales had risen 3 per cent in the four months to October. That reflected improved growth from branded desserts and spreads.

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The group nonetheless highlighted the fact that costs were higher than last year for its meat substitutes operation - management is attempting to boost the efficiency of its Methwold factory. Sales were also 3 per cent ahead of last year in the culinary brands unit and up by the same amount in the cake business.

However, Premier, didn't provide any figures for its bakery division. The group merely said that sales were "moderately ahead of last year", thanks to price increases on loaves of bread, but admitted that volumes were down. Premier has passed on increased wheat costs to customers earlier than its competitors, raising prices again in October. As a result, Hovis products are pricer than those of rivals brands Warburtons and Kingsmill. Still, management highlighted that the integration of RHM and Campbell was going well and should deliver £17m of trading profits in 2007.

EVOLUTION SECURITIES

Buy. The group is on course to deliver £113m of cost savings from integrating RHM and Campbell, of which £17m should accrue this year. As a result, Premier Foods is on track to meet market expectations for the current year. And integration savings will build next year, leading to EPS advancing by 32 per cent in 2008 to 22.6p. But with the shares trading on just nine times' 2008's expected earnings, and with a prospective 2008 yield of 6.6 per cent, that progress doesn't seem to be reflected in the price.

SHORE CAPITAL

Hold. Until forecasts are met and beaten, we see the scope for a share-price rating expansion as limited. What's more, the relatively low-looking PE ratio looks justified when set against the group's reasonably full-looking enterprise value to cash profits multiple (EV/EBITDA) - that reflects the chunky debt pile (around £1.75bn). We expect EPS for 2007 of 14.6p and, on the basis of our downgraded 2008 EPS estimate of 20p, the EV/EBITDA multiple of around eight times leaves the shares close to sell recommendation territory. What prevents that is the yield support.

Tip Update

Buy

Admittedly, at 209p, the shares are well down on our buy tip (310p, 9 March 2007). Certainly, raw material prices are an issue but, with the bulk of the business trading well, the de-rating is looking too churlish. Add that to the undemanding share-price rating, and we reiterate our buy advice.

Last IC view: Buy, 247p, 5 Sep 2007.

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