Leading branded food producer Premier Foods (PFD) looks a savvy way to play a decline in eating out as cash-strapped consumers focus more on affordable meals at home.

Potential earnings catalysts include a growing overseas business, and the array of new products Premier Foods is launching including Plantastic branded Millionaire Flapjacks, Mr Kipling Brownie Bites and pigs-in-blanket flavour Bisto granules in time for Christmas.

Net debt continues to fall year-on-year, despite restarting dividends and the £44 million acquisition of The Spice Tailor, an Asian ingredients label adding extra flavour to the growth mix.

FTSE 250 constituent Premier Foods makes everything from convenience foods and cakes to cooking sauces, desserts and gravies, and roughly 94% of UK households buy one or more of its products every year. Its higher margin branded portfolio spans Mr Kipling, Sharwood’s, Ambrosia, Batchelors and Bisto as well as sauces under the Homepride and Loyd Grossman labels.

These brands are performing well in a tough consumer environment and Premier Foods is flexing its pricing power muscles to help protect margins from rising input prices.

UK shoppers are feeling the pinch from inflationary pressures, which could see them trade down to cheaper private label products in droves. Yet Premier Foods is still positioned to benefit through its non-branded business, which makes cakes and desserts on behalf of top UK food retailers. The non-branded arm is performing strongly helped by pricing and new business wins.

Premier Foods has positive momentum, with group sales fattening up 6.2% in the six months to 1 October 2022, stripping out Spice Tailor’s contribution, and with second quarter sales growth strengthening to 6.4%.

Adjusted pre-tax profit rose 11.9% to a slightly better than expected £47 million. International like-for-like sales were up 11% amid positive progress across Australia, Canada, Europe, Ireland and the US, with Sharwoods, Mr Kipling and The Spice Tailor now spearheading Premier Foods’ overseas growth push.

Peel Hunt forecasts adjusted pre-tax profits growth from £123.5 million in the current year to 1 April 2023 to £128.5 million and £133 million in 2024 and 2025 respectively, with progressive dividend payouts continuing.

Shares in Premier Foods soared in 2020 after the company proved it had got debt under control and that it was generating enough cash to increase investment in product innovation and marketing. That saw investors prepared to pay a higher multiple of earnings to own the stock.

We believe the current rating of 10 times forecast earnings for the year to March 2024 is still too cheap for a business that is now in much better shape and has positive drivers to further grow earnings.

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