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StockBeat: Premier Foods at 6-Year High as Turnaround Bears Fruit (and Cake)

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·3-min read
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By Geoffrey Smith -- Feeling depressed about the second wave of Covid-19 coming down the road? Here, have a Bakewell tart from Mr Kipling. It looks like everyone else in Britain is, after all.

Premier Foods, the company behind a collection of brands that are household names in the U.K. but largely anonymous outside it, is looking forward to better times after swinging to a pretax profit of 54 million pounds ($67 million) from a loss of 43 million pounds a year earlier.

The company said it expects revenue and profit for the year through March 2021 to come in above its expectations, after revenue in its fiscal first quarter rose some 20% thanks to stockpiling during the first phase of the pandemic.

The group, which had threatened to buckle under the weight of its pension liabilities until a restructuring last year, said it “continues to see elevated levels of demand for its Grocery brands during the COVID-19 pandemic” and is already thinking about what to do with the extra money.

It didn’t drop any clear hints about raising shareholder payouts, but did say it was working on a new international strategy “with the objective of delivering sustainable profitable growth.”

Premier Foods shares rose 6.6% to their highest in six years on the update. They’ve more than tripled from their March low and, at barely seven times fiscal 2020 earnings, look better value than most ‘value’ stocks given the comparative reliability of its cash flows, which now look more capable of sustaining the group’s debt. Net debt fell to 2.7 times EBITDA in the past 12 months, below the company’s internal target multiple of 3x. By contrast, the FTSE 250 index fell 1.9% and the STOXX 600 fell 1.8% on fears that the coronavirus is spiralling out of control again in much of the U.S.

Not everyone may be excited by the prospect of the company spending money on growing abroad, however. The improvement in Premier’s finances appears in large measure to be the result of concentrating on traditional strengths. International sales have dwindled to less than 5% of group revenues as of last year. The end of the post-Brexit transition period in December should logically strengthen its position in the U.K. at the expense of European rivals and, by the same logic, make expansion in Europe harder. Whether escaping the EU’s regulatory framework makes expansion outside that market any easier is still anybody’s guess.

In short, a solid, low-risk bet on U.K. consumption may become a higher-risk bet on pursuit of a bigger pie. Even so, management, which has delivered 11 straight quarters of growth in the U.K., can expect to be given the benefit of the doubt for now.

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