Premier Foods, the company behind Mr Kipling and Hovis, has jumped more than 6% after a broker upgrade ahead of an expected fundraising.
The company racked up huge debts by buying Rank Hovis McDougall, and suffered poor trading. But things are on the mend, with disposals aiding the balance sheet and a better performance from its remaining businesses. In July Premier said full year profits would be at the top end of forecasts, helped by cost cutting.
Now Shore Capital - which has been unconvinced by the company for some while - has moved its recommendation from hold to buy, which is sees as a significant development.
When Premier's share price was weak, it has been reluctant to raise equity but with a recovery, Shore Capital believes a refinancing through £250m of new equity and a £350m corporate bond could be on the cards. Analyst Clive Black said:
The stock has appreciated in recent weeks and months and we sense that this may lead management to reappraise its position on balance sheet management; we believe that the share is in fact re-rating in anticipation of a stronger constitution and the subsequent expectation of rating expansion for a de-leveraged group.
Separately, we have seen stories in the trade press whereby it is suggested that Grupo Bimbo, the international bakery business, may be interested in acquiring Premier's Hovis brand, which has been under pressure for some time, most recently reflected in the loss of significant Co-operative stores volume to Allied Bakeries. We cannot really confirm or deny such an acquisition story although the fact that Premier Foods has not made an announcement to the market suggests to us that the group's board has not yet been presented with anything firm with which to comment upon.
In attempting to provide some indicative thinking, we suggest a central scenario whereby: £250m of new equity is raised noting as we do that the current market capitalisation of Premier Foods is £348m; [and] a £350m 7-year corporate bond at a yield of 7.5% (£26.25m annual coupon) is issued, so providing some more certainty as to financing, with provision perhaps to pay-down each year over the period, depending upon operating performance.
So, with imperfect information, we have decided that it may be better to move before rather than after any update from the company on refinancing. The recent share price appreciation, however, leads us to believe that an announcement of sorts is closer. So, after the best part of a decade of caution, Shore Capital upgrades Premier Foods' shares from hold to buy.
Premier is currently up 9.5p at 159.25p.
