Without disposals, net debt would be still be an estimated £1.1bn in 2016. “Disposals are therefore essential to rehabilitate the balance sheet but, we believe, even the next four deals will leave net debt at a still high 4.6 times EBITDA by December 2013,”they said. It would also dilute earnings per share (EPS) by 21%.
Although Premier’s new banking facilities gave it time to improve trading, Jones and McNeela warned: “The company still has a mountain to climb.”
£330M of disposals
Premier has committed to £330M of disposals proceeds by June 2014. “This is close to our estimate for the sale of three factories – Histon, Knighton and Middleton – and a raft of brands,” said the analysts.
But even allowing for a further £20M of cost savings, they warned the firm was unlikely to avoid either the net debt of 4.6 times EBITDA or the 21% EPS dilution.
Consequently, most of the firm’s cash flow over the next five years is likely to be spent on pension contributions and bank fees. That could make more disposals necessary.
Despite the high borrowing and tough trading conditions, Jones and McNeela remained confident that Premier's management team would succeed in improving the trading performance of the group. “We feel comfortable that Premier’s new management team can improve upon a truly shocking trading performance last year. We believe Premier has the right strategy.”
Double marketing spend
Ceo Michael Clarke has pledged to focus on eight power brands, double marketing spend, cut costs and strengthen customer relationships.
The eight power brands – Hovis, Mr Kipling, Batchelors, Bisto, Ambrosia, Sharwood’s, Loyd Grossman and Oxo – delivered combined sales of £871.2M last year. This was down by 5.6% on the previous year but still accounted for 48% of group sales.
Marketing spend is due to double this year, from about £25.M to £51M. Over the next three years the marketing budget is expected to triple to reach about £83M. “We estimate this would raise marketing spend from 2% of branded sales this year to an estimated 6.1% in 2014.”
Cost savings include 4% a year in controllable manufacturing costs and £40M of overheads by the end of next year.
The cautious vote of confidence from Jones and McNeela follows similar backing recently from Shore Capital. While acknowledging there is “no silver bullet” to remedy the group’s problems, analysts Clive Black and Darren Shirley said it was also not "mission impossible".
“The appointment of Mike Clarke as ceo of Premier Foods was a key factor behind our decision to upgrade our recommendation [to buy] on the share.”
