Even though their recent climb in price has been very impressive, Mark Watson-Mitchell still considers that at just 67.5p each the shares of Premier Foods are very capable of heading 50% higher.
I make no apologies for coming late to profile this company, despite its shares having risen from 18.5p in late March this year to a high of 72.8p late last week.
That near quadrupling in the price of Premier Foods (LON:PFD) has not put me off one iota.
That is because I see that the near £600m foods group is going like a train and I feel that its shares, now 67.5p, have at least a 50% gain to go for over the next year, if not achieved well inside that time frame.
Employing over 4,000 people at some 15 manufacturing sites and offices in the UK, Premier is one of Britain’s biggest listed food companies.
It also has significant businesses in Ireland and Australia, and it is at an early stage in building up its international partnerships across the world.
It principally operates in the ambient food sector – those are foods that would normally be stored refrigerated but have been processed so that they can be safely stored at room temperature. This is the largest sector within the UK food market.
The group’s grocery business is segmented into four main categories: flavourings and seasonings; cooking sauces and accompaniments; quick meals, snacks and soups; and ambient desserts.
It also has a portfolio of other branded and non-branded products that it makes on behalf of a number of the UK food retailers.
The company has a mass of brands, some of which are its own and some of which are operated under licence.
That list is almost endless but I will list a few of the top names with which we are all familiar, such as: Ambrosia, Angel Delight, Atora, Batchelors, Be-Ro, Bird’s, Bisto, Cadbury, Homepride, Loyd Grossman, Lyons, Marvel, McDougalls, Mr Kipling, Oxo, Paxo, Saxa, Sharwood’s and Smash.
I am not, at this stage, put off by the large corporate debt that the group is carrying, which fell by a useful £62m last year to £408m. The cash flow generation will see that continue to decline.
Last Wednesday the group declared its results for the 52 weeks to 28 March 2020. They showed sales up 2.8% to £847.1m, while its adjusted pre-tax profits were 6% better at £93.3m and earnings 5.4% up at 8.9p per share.
Consensus estimates suggest that the current year to 28 March 2021 could see £890m sales and £103m pre-tax, with earnings coming out at 10p per share.
For the 2022 year, revenues of £903m, profits of £112m and earnings of 10.8p per share show that my objective of the shares being over 101p has merit – even then they would be undervalued for such a leading brand owner and marketer.
At the current 67.5p, that puts Premier Foods shares out at just 7.5 times historic earnings and 6.75 times current, then 6.2 times prospective earnings. Those ratings are far too cheap for such a well spread and profitable company – its peers are on twice those earnings!
There are 848.2m shares in issue. Nissin Foods Holdings, with whom the group has some brand and marketing tie-ups holds 19.4% of the equity.
Other large holders include Oasis Management (11.9%), Paulson & Co (7.52%), Merrill Lynch (4.97%), Brandes Investment Partners (4.88%), Aberdeen Asset Investments (4.55%), Dimensional Fund Advisors (3.86%), Deutsche Bank Brokers (3.90%), JP Morgan (2.25%), and PSG Asset Management (1.76%).
Encouragingly, I did see that last Wednesday nine of its directors and senior managers acquired around a total of 500,000 shares @ 65p to add to their existing holdings.
It is noted that some 94% of UK households have Premier Foods products. Now perhaps the UK’s investors should be investing in this group as it really does become recognised as a major food supplier and a profitable one at that.
Brokers Shore Capital and Peel Hunt both rate the shares as a ‘buy’, with the latter aiming for 90p a share.
Even though their recent climb in price has been very impressive, I still consider that at just 67.5p each the shares of Premier Foods are very capable of heading 50% higher.