Premier Foods’ profits and shares show momentum

Food inflation in the UK rose from 5.9 per cent in March 2022 to over 19 per cent in March 2023, according to the Office for National Statistics. In this environment, it’s safe to assume that consumers might have switched to own-brand products to minimise their spending. This would, in turn, lead to falling sales for manufacturers of brand-name foods. 

The full-year results from Premier Foods (PFD) confirm that this trend, known as downtrading, is currently at play in the UK. But the company’s range of branded products – which includes Mr Kipling cakes and Bird’s Custard – has also proved more resilient than markets expected. 

Branded revenue for the 12 months to the start of April increased by 9 per cent to £844mn, while non-branded revenue was up 28 per cent to £162mn. All told, Premier’s trading profit increased by 11.5 per cent, and at 15.7 per cent its trading margin was flat year on year – which is something of a rarity given soaring input costs in the food sector. Chief executive Alex Whitehouse attributed the result to “a combination of cost efficiencies and pricing”. 

The company was also able to reduce its net debt by more than £10mn over the course of the last financial year and consequently shrunk its net debt to an adjusted Ebitda multiple of 1.5 times (in line with medium-term targets).

In what is perhaps a telling sign of the times, Batchelors (the brand behind Super Noodles) is now Premier’s biggest seller within its Grocery division, with its revenue increasing 20 per cent year on year. According to management, the company’s total share of the UK grocery market grew by 64 basis points across the year. 

The sweet treats division was a rare underperformer, with its divisional contribution falling by £6.4mn year on year to £27mn. Analysts at Peel Hunt noted sales were “impacted by lower volumes due to lower promotional activity, the impact on volumes of higher pricing, and some unscheduled maintenance on a Cadbury cake plant line”.

Premier Foods currently trades at a palatable 11 times estimated earnings for the current financial year. Markets are clearly continuing to feel positive after it upgraded its earnings guidance in March – with shares up more than 6 per cent in a month. We see this momentum continuing. Buy.

Last IC View: Buy, 114p, 19 Jan 2023