Premier Foods’ FY20 results demonstrate the substantial progress the company has made over the past few years. The UK business has now grown for 11 consecutive quarters and Q121 is set to be very strong. In the UK the brands grew ahead of their categories and the innovation rate has hit a new high. A new landmark pensions agreement was signed in April, which could potentially significantly reduce the future funding requirements for Premier Foods. The recent triennial actuarial valuation delivers further credence to the pensions deal.
Group revenues were up 2.8% with an acceleration in Q4 (+3.6%). Trading profit was up 3.2% to £132.6m and adjusted PBT was up 6% to £93.3m. Net debt was down to £408.1m on a pre IFRS 16 basis, with net debt/EBITDA of 2.7x, which beat the March 2020 target of 3.0x. The combined pensions surplus is now £1230m.
The outlook is positive: revenues in Q121 are expected to be c 20% ahead of the prior year, reflecting strong demand. The group now expects to exceed current market expectations for FY21 despite incurring additional operating costs in the supply chain. In addition, the cost-savings programme is now expected to exceed initial target savings.
Premier Foods trades on 6.2x FY21 consensus earnings, which is a significant discount to its global and UK food manufacturing peer group and is due to its much higher level of debt than its peers. The UK mid-cap peer group trades on an average FY21 P/E of 15.1x, while the global peers trade on 19.5x FY21 P/E. On EV/EBITDA it trades at 5.7x FY21, which is still at a discount to its peers (8.7x and 13.6x respectively). The company has suffered high levels of indebtedness for over a decade, but the focus on sales growth and innovation over the last few years has paid off. The level of debt is still relatively high, but as the pension deficit and leverage reduce, there should be more free cash flow and hence the board may consider restarting dividend payments in future.