Premier Foods helped by more home cooking

On the same day that these results were released, the latest inflation data from the Office for National Statistics (ONS) revealed that food and non-alcoholic beverage prices had risen by an eye-watering 16.4 per cent in the year to October. In this context, the fact that Premier Foods (PFD) maintained a 35 per cent gross margin was a solid result. The purveyor of Mr Kipling cakes and Ambrosia custard said that price rises and cost savings had mitigated a difficult cost environment, although it sensibly acknowledged "risks around recent rises in input cost inflation and potential changes in consumer behaviour”.

The result of pricing action was seen in the top line. Grocery revenues rose by 7 per cent to £304mn, helped by a strong performance by non-branded revenues, which were up by a fifth. Grocery’s market share growth of 34 basis points, with notable sales improvements posted by sauce ranges such as Loyd Grossman and Sharwood’s, suggests that consumers are trading down to the company’s products as they eat out less and cook more at home.  

The sweet treats division, meanwhile, grew at the slower rate of 5 per cent to take sales up to £116mn. Non-branded revenues were also the standout on this side of the business, up 36 per cent. But market share performance was less impressive, falling on the back of reduced promotional activity, although the company said it expects this to be “temporary”.

On the balance sheet side of things, a cash outflow of £56mn was driven by the £44mn acquisition of the Indian and South East Asian spice company The Spice Tailor, which looks like a good addition. Good cash generation, lower interest costs after last year’s debt refinancing, and plenty of headroom in the company's £175mn revolving credit facility are all positive signs.

Peel Hunt analysts said that Premier Foods “is in a good position to manage a tough market with its market-leading brands and affordable pricing”. That looks accurate, given the company has maintained its full-year expectations and flagged plans for further pricing action, new product launches, and more brand investment. The shares trade at 10 times house broker Peel’s earnings forecasts for the next three financial years. This valuation compares favourably to food peers such as Associated British Foods (ABF) and Cranswick (CWK), which analysts rate at a consensus 13 and 15 times forward earnings, respectively, according to FactSet. With trading-down trends playing in the company’s favour, sales up 11 per cent, and progress made in international markets, we remain bullish. Buy.

Last IC View: Buy, 122p, 19 May 2022