Shares in Mr. Kipling cakes-to-Bisto gravy maker Premier Foods (PFD) powered 16.8% higher to 38.2p on Monday after the food manufacturer agreed a transformational pensions agreement that will reduce future contributions and free up cash for reinvestment in the business.
Premier Foods now expects annual trading profit to be at the top end of market expectations, after the coronavirus pandemic fueled a spike in volumes during March, and also announced positive progress on paying down its significant debt mountain.
PENSION MILLSTONE PROGRESS
As Shares outlined here in January, leverage from debt and pension responsibilities have long-weighed on the Premier Foods equity story and stock market rating. Yet following an extensive strategic review, the food producer today announced a landmark agreement with its pension schemes which significantly improves its long standing pension funding situation.
Put simply, a ‘segregated merger’ of all its pension schemes will see pension deficit contributions greatly reduced going forwards.
Premier Foods set out a medium-term schedule, which indicates annual pension contributions could fall from the present £38m a year to somewhere between £17m-to-£30m from 2023/24.
Rationalisation of the schemes could save operating expenses of circa £4m per year from full year 2021, thereby speeding up de-leveraging and giving Premier Foods the scope to return to paying dividends.
Besides the positive pension news, Premier Foods also highlighted good progress with cash generation in the year to 28 March 2020, expected to be £90m , making for a notable reduction in the net debt-to-EBITDA ratio, (earnings before interest, tax, depreciation and amortisation) now expected to be comfortably below management’s previous target of three-times.
STOCKPILING SPIKE
In a third serving of upbeat news, Premier Foods also expects to report trading profit for the 52 weeks ended 28 March 2020 ‘at the top end of market expectations’. This follows a bumper fourth quarter in which volumes rose sharply in March as the COVD-19 outbreak triggered stockpiling by shoppers.
In the UK in March, Premier Foods’ sales surged ahead by 15.1%, driving domestic sales for the fourth quarter up by around 7.3%. Even though sales have eased back post the stockpiling peak, they are still thought to be ahead year-on-year with more meals being eaten at home during lockdown.
Shore Capital expects to upgrade its 2020 trading and pre-tax profit estimates for Premier Foods and sees scope to nudge up its 2021 estimates too.
Reiterating its ‘buy’ rating on the shares, the broker commented: ‘The pension news is great, the beat to net debt forecasts is fabulous and the strong current trade, well that is wonderful. The de-leveraging permits a rating expansion. Who would have thought Premier could deliver this welcome triple whammy.’
Russ Mould, investment director at AJ Bell, agrees that all these factors put Premier Foods ‘in a better position to start shaking off its reputation as a zombie company which hasn’t been able to invest much in its business. Guidance that pension deficit contributions will be greatly reduced essentially gives the company more scope for product innovation, marketing and upgrading its assets. Further down the line it could even contemplate paying dividends.
‘The market has been waiting for this news for a long time, hence why its share price has rocketed on the announcement.
‘However, this won’t be an easy win for Premier Foods. There is intense competition from private label suppliers and rival brands, and near-term it faces the challenge of likely subdued consumer spending if the country goes through a difficult recession.’