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Premier Foods: ‘grow brands or risk takeover’ – analyst

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By Rod Addy+

Last updated on 20-Jun-2014 at 18:02 GMT

Premier Foods is vulnerable to takeover unless it can grow its core brands – and it is running out of excuses fast, according to Panmure Gordon analyst Graham Jones.

Falling sales of Premier’s so-called ‘power brands’ in its second financial quarter had been “disappointing”, said Jones.

He acknowledged Premier’s core brands did not suit the unusually warm spring and summer the UK had experienced this year and Premier’s claim that innovation was focused on the second half of the year.

However, he told “This has got to be the last time that you have the excuse that results will be second half weighted or that you have phasing of innovation. Innovation has got to be constant.”

Export potential

Looking to exports for further growth was one option for Premier’s core brands, said Jones. “There’s definitely potential for that. Whether there would be even greater potential if Premier was acquired by a bigger group is debatable … We are seeing a lot of M&A [mergers and acquisitions] in the market.”

Premier’s declining share price since it renegotiated its refinancing package earlier this year also meant prospective buyers could get a good deal, he said. “The share price has just gone down and down, ironically since the balance sheet was resolved. That could create a bidding opportunity.

“Premier’s value to shareholders may not be worth as much as its value to a trade buyer or private equity house … If you look at the shareholders on the list, you do wonder whether they would start to be thinking about this as well.”

‘Focus on those brands’

That said, Jones praised Premier Foods managers. “You shouldn’t underestimate the amount of work they have done. They have done a good job of taking fixed costs out of the group. But the one thing they have got to do is just focus on running those brands, and they are good brands.”

He expected the firm to deliver better brand management. But in an analyst note, he and fellow Panmure Gordon analyst Damian McNeela stated: “If it doesn't we wonder whether, with the hard work done, Premier starts to look ripe for a take-out.”

Shore Capital analyst Darren Shirley also referred to Premier’s second quarter (Q2) trading performance as “disappointing”.

In the current year, sales of its power brands were no longer forecast to grow by previous estimates of 2–3%, Shirley said. In particular, sales were weak in flavours and seasoning and easy eating, especially gravies and stocks.

Broadly flat power brand sales

Management was issuing no new guidance for power brands, although Shirley predicted broadly flat sales.

Earlier today (June 18), Premier announced a joint venture with Specialty Powders to co-pack and co-manufacture powdered drinks and desserts at its Knighton factory in Staffordshire. The deal, entailing shifting some production to its Ashford site, together with separate consolidation of third-party logistics, would increase efficiency and cut costs, the company claimed.

“In what we see as a clever move, Premier is effectively exiting its least utilised factory together with £16M of loss-making own-label sales, and boosting efficiencies at Ashford, which we estimate could take out another £5-8M of costs,” said Jones and McNeela in their note.

Premier Foods Brands include Ambrosia desserts, Bird’s Custard, Bisto gravy and Mr Kipling cakes.

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