Investec analyst Martin Deboo said: “The spot price of wheat is currently higher than in the crisis year of 2008 and is at a level associated with low profitability in the past.”
He said the outlook after next month’s harvest remained uncertain but Investec expected prices to remain high and was therefore reducing its forecast for Premier Foods’ earning before interest and tax by 2% for 2012 and by 3% for 2013.
In its note Investec said wheat was probably Premier’s biggest purchased commodity with it buying around 1,500t a year, and that more than half of this, 825t, was used by Hovis.
Difficult environment
The analyst added: “Premier has, of course, made life difficult for itself by standing behind the marketing claim that Hovis uses only 100% British wheat.
“Assuming the claim is maintained, the company is entirely on risk for UK wheat prices and can have no recourse to alternative sources of supply, such as Canadian wheat [used by Warburton’s].”
Investec concluded: “If wheat prices remain high, we think it will be in the[bread making] industry’s collective interest to seek a price increase in the autumn. So we are not suggesting that the bulk of the potentially higher wheat costs won’t be recovered – eventually.
“But what has hurt Premier in the past has been the potential recovery lags inherent in that process and potential game-playing by competitors who may have different cost structures and/or investment horizons.”
Concern about sell-offs
The analysts also expressed some concern about Premier’s plans to sell-off non-core businesses to bring down its debt. They conceded that it was at an early stage, with around 75% of the businesses earmarked for disposal still remaining, but described it as “a little light so far”.
Looking ahead to the publication of Premier’s interim results for the six months ended 30 June 2012, Investec said sales were ahead in the first quarter and that good progress was being made on cost savings.
However, Investec warned that it had concerns about uncertainty over the price of wheat and because it believed Premier had not raised enough funds from selling its non-core businesses.
