The time has come for Premier Foods to deliver

Analysts are convinced Premier Foods shares are set for an upturn, but the market just isn’t playing ball.

The manufacturer of Sharwood’s and Bisto currently has no sell ratings at all on the stock, four buy ratings and a mean average share price target of 72p – over 50% higher than its current level of 47p.

Despite this analyst fan club, the share price hit its lowest level since 2011 on Monday when it dipped as low as 44.95p - a 75% drop since October last year.

The underlying cause of this dissonance was highlighted by the company’s first half results this morning, which provided plenty of evidence for cheerleaders and critics alike.

On the negative side, Premier’s first half pre-tax loss escalated to £54.9m against a £15.7m loss last year, while overall revenues were 6.1% down including a fall of 4.9% for its so-called ‘power brands’.

Underneath the headline figures there is signficantly more reason for encouragement. Stripping out the results of previously completed disposals and exceptional re-financing costs saw underlying trading profit come in above expectations – rising 2.1% to 28.1m. The company was also able to improve its gross profit margin from 33.2% to 34.6% during the period.

Jefferies analyst Martin Deboo saw plenty of cause for cheer, writing: “Viewed in the round, this feels a reassuring statement to us that should be positive for the shares, given recent weakness.”

“That this [performance] has been delivered hot on the heels of a fresh Tesco warning, and amidst some of the toughest conditions in UK grocery for years, is a measure of Premier Foods’ success.”

Therein lies the problem. Despite the company arguably being on its soundest footing for years, the market is struggling to buy the argument that Premier can return to growth in an era when its main customers – the supermarkets – are getting savaged.

CEO Gavin Darby has made huge strides in restructuring both the business (controlling costs, selling off non-core product lines and reducing the number of product codes and suppliers) and the company’s balance sheet after a major capital restructuring in March.

This transformation is proving slow in translating to improved sales – and that seems to be making investors twitchy in the middle of a raging price war.

Darby told The Grocer that the so-called price war is not having a particularly catastrophic effect on Premier’s business. Firstly, the focus of price competition has been on own-label goods and fresh products like milk, vegetables and bread, meaning that (as recent data collated by The Grocer showed) Premier’s pricing has remained robust. Secondly, he explained that he has not experienced any extraordinary pressure from retailers over terms. “Frankly I don’t see any big difference because the level of intensity of those trading dialogues is already very high,” he said.

Premier expect to improve sales in the second half as it rolls out new products and consumer marketing  focussing on its five key product categories. Darby said the company was now “centred” on driving these categories and the results of that effort “will be the ultimate scorecard”.

It’s an acknowledgement that for all the progress Premier Foods has made, it must now reassure market on sales. Premier makes two-thirds of its profits in the second half and has back-loaded marketing and innovation while benefitting from easier sales comparables.

Premier has laid solid foundations in the first half, now comes the time to actually build the house.