Factsheet Commentary : May 2021

While others may prefer to take a more speculative approach, our primary focus remains on constructing a resilient portfolio for our investors. We seek out quality businesses with exceptional management that can continue to make progress in both good times and bad. With that in mind, let’s take a look at one of our portfolio holdings that has demonstrated excellent resilience over the past year. 

Premier Foods owns some of the nation’s best loved food brands. It is a category leader in flavourings & seasonings (Bisto and OXO), quick meals (Bachelor’s), ambient cakes (Mr Kipling) and ambient desserts (Ambrosia, Angel Delight and Bird’s). Not one to rest on its laurels, Premier Foods continues to extend its range by introducing better-for-you versions of established favourites, such as Bisto 25% saltreduced gravy and Mr Kipling 30% sugar-reduced cake slices. In FY 21, revenue grew by 10.3%, to £934m, and trading profit increased 12%, to £148m on a 52 week comparative basis. 

The company is currently enjoying tailwinds from several consumer trends that are likely to persist over the coming years: healthy eating, indulgence, snacking and sustainability. It was also a business that actually benefited from the coronavirus pandemic; UK households prepared 136m more meals at home over the last year than they would have in a typical year. In a time of uncertainty, consumers sought out brands they trusted – hence Premier’s market share increased across all of its key categories. 

Historically, Premier Foods suffered from a large debt burden and ominous pension obligations. Often, just one such liability would be enough to bring a company down (or at least put a lid on its share price) but when both are present to a significant extent, a headache for shareholders is all but assured. 

The U-turn began in 2019, following a year long strategic review that led to a reshaping of the board and the promotion of Alex Whitehouse to the role of CEO. The current executive team have not only reduced the cost base, but also given the heritage brands a new lease of life. CFO Duncan Leggett has re-shaped the balance sheet and debt has been significantly reduced. On the pension front, the Trustees have agreed to a segregated merger of its pension plans, which will lead to a reduction in annual contributions and, hopefully, over time, a surplus will emerge. The improved financial position of the business has given management the confidence to reinstate the dividend – after a gap of 13 years. 

The shares peaked at £22 in December 2006 before precipitously declining and, with the exception of a few false dawns, remained largely out of favour with the market until 2020. The current price level stands at around £1, illustrating serious wealth destruction on the part of previous management teams. However, we focus on the future. 

Over the next 3-5 years, we expect the company to continue on its growth trajectory and the stock market to re-rate the business. Patient shareholders will benefit when this hidden gem is given the pedestal it deserves.

Sterling Investments Management Ltd
Lynwood House 2-4 Crofton Road,
Orpington, England, BR6 8QE
info@sterlingim.co.uk

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