- Job cuts announced
- Sweet treat sales down
Higher prices at Premier Foods (PFD) helped total sales rise by 12 per cent against the prior year in the food manufacturer’s key Christmas quarter, although given this growth rate was less than industry-wide cost inflation (UK food prices were up 16.8 per cent in the year to December, according to the ONS) it highlighted the difficult trading environment. And while there was a strong performance by the company’s grocery division in the 13 weeks to 31 December, with a 17 per cent sales uplift driven by seasonal home cooking, sweet treat sales struggled. The mixed picture meant a flat performance from the shares on the day, following a strong recent run.
It was no surprise that the standout grocery division, with branded sales up by 16 per cent to £202mn and non-branded sales up by 30 per cent to £34mn, were driven by pricing changes. As with food business peers, Premier Foods is trying to achieve a difficult balancing act of putting through price increases while protecting volumes, with sectoral inflation still stubbornly high. Shoppers may have swallowed price rises over the Christmas period, but this can’t be counted on ad infinitum as the cost of living crisis continues to bite.
The poor sweet treat performance, where sales were down by 1 per cent, was impacted by unscheduled maintenance issues at a cake plant. This meant that a solid performance from the non-branded part of the division, where sales were up 23 per cent to £30mn, was offset by an 11 per cent sales slump to £52mn in the larger branded stream. On the plus side, there were pie and tart contract gains.
The company confirmed that it will close its Knighton manufacturing site - where non-branded powdered beverages are produced - due to its focus on branded growth and the site's “marginally unprofitable” operations. This will lead to 300 job losses. Premier Foods, which expects to take an exceptional cash costs hit of £10mn as a result, said that the closure will help overall trading profits and bump up branded sales mix.
Jefferies analysts are bullish on the potential for a Premier Foods re-rating. They said that “with the growth track record burgeoning, earnings quality improving and the balance sheet de-leveraging (both debt and pension liabilities) there is headroom to probe fresh highs”. The shares are valued at a consensus 10 times forward earnings, according to FactSet. This is more expensive than the five-year average of seven times. But with the company reiterating that full-year board expectations should be met despite cost challenges, Premier Foods still looks like an attractive sector option. Buy.
Last IC view: Buy, 110p, 16 Nov 2022
