Ownership of some of Britain’s best-loved brands including Mr. Kipling, Batchelors and Bisto, appetising growth potential and a transformed financial position that should support double-digit dividend growth are reasons to buy cooking sauces, cakes and custards maker Premier Foods (PFD).
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Admittedly, the stock has already rallied 350% over the past five years to reflect an impressive turnaround and balance sheet rehabilitation under CEO Alex Whitehouse, yet the shares remain attractively valued and falling debt levels combined with forecast upgrades should offer a powerful re-rating catalyst. Shares believes further upwards earnings revisions could be on the menu, potentially as early as the full-year results (16 May), driven by domestic market share gains, growth in the US and Australia and a tailwind from an improving consumer backdrop.
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RECIPE FOR SUCCESS
Guided by Whitehouse and CFO Duncan Leggett, Premier Foods is one of Britain’s biggest food producers and the owner of well-loved brands including Mr. Kipling, Ambrosia, Oxo, Paxo, Sharwood’s and Lloyd Grossman, which form great components of affordable meals.
In fact, over 90% of UK households buy one or more of Premier Foods’ products every year, giving the FTSE 250 constituent’s earnings a resilient bent, while management believes three brands have global potential, namely Mr. Kipling, cooking sauce brand Sharwood’s and The Spice Tailor, a fast-growing Asian ingredients label bought in 2022 which marked Premier’s first acquisition in 15 years.
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This deal was followed by 2023’s takeover of FUEL10K, a granola, oats and drinks products business which boosted the group’s position in the breakfast category, building on the success of its Ambrosia porridge pots.
Over the past decade, Hertfordshire-headquartered Premier Foods has undertaken considerable heavy lifting in rebuilding its balance sheet and reducing onerous cash commitments to debt holders and pension schemes. This has allowed it to invest behind its brands and deliver consistent growth and a cycle of forecast upgrades.
In the third quarter to 30 December 2023, Premier Foods cooked up a 14.4% rise in group sales as the international business had another very good quarter and sales in new categories more than doubled, with Ambrosia Porridge pots and Mr. Kipling and Angel Delight ice-cream both proving standout performers.
The £1.39 billion cap also issued an upbeat outlook statement, insisting it continued to trade strongly, delivering further progress against its strategy backed by by another quarter of double-digit sales growth and market share gains. Now into the final quarter of its financial year, the company observes it is well on track to deliver against its previously raised profit expectations, commentary which implies potential for further upwards forecast revisions in the months ahead.
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DIVIDEND GROWTH ON THE MENU
On 6 March 2024, Premier Foods announced it had struck an agreement with the RHM Pension Scheme Trustee to suspend pension deficit payments from 1 April 2024. The suspension will save Premier Foods £33 million in cash contributions in the year ending 29 March 2025 and deliver a healthy boost to its already attractive free cash flows.
This can support targeted acquisitions, accelerated capital investment to drive growth as well as a progressive dividend; Premier Foods returned to the dividend list in 2021 with a modest distribution after a 13-year absence.
With debt continuing to reduce, Shore Capital forecasts a jump in pre-tax profits from £152.3 million to £160.3 million for the year to March 2025, which translates into EPS (earnings per share) of 13.6p and a 2.1p dividend that is 6.5 times covered by earnings. The broker’s estimates for full-year 2026 point to pre-tax profits of £168.3 million, EPS of 14.3p and a 20% increase in the shareholder reward to 2.5p.
Based on 2026 estimates which look conservative, Premier Foods’ shares trade on an undemanding prospective PE (price to earnings) ratio of 11.2 which implies re-rating scope. And if this undervaluation persists, Premier Foods, which fended off a bid from US spices-to-condiments company McCormick (MKC:NYSE) back in 2016, could once again become the subject of takeover interest.
These articles are provided by Shares magazine which is published by AJ Bell Media, a part of AJ Bell. Shares is not written by AJ Bell.
Shares is provided for your general information and use and is not a personal recommendation to invest. It is not intended to be relied upon by you in making or not making any investment decisions. The investments referred to in these articles will not be suitable for all investors. If in doubt please seek appropriate independent financial advice.
Investors acting on the information in these articles do so at their own risk and AJ Bell Media and its staff do not accept liability for losses suffered by investors as a result of their investment decisions.
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