Investment Column: Put poor Premier Foods back on the shelf
Tuesday 05 October 2010
Our view: Sell
Share price: 17.9p (+1.69p)
Shareholders in Premier Foods have recently found themselves in a pickle as thick as the Branston the company makes. The shares reached 325.5p in February 2007 but since then it has been downhill and they sunk to a stomach cramp-inducing 16p on Friday. In short, Premier Foods is paying for loading up its balance sheet with debt to fund an acquisition binge that in recent years has included the UK and Irish operations of Campbell's Soups, and RHM, the maker of Hovis bread.
Yesterday, the stock received a much overdue boost following Sunday's confirmation of approaches for its meat-free business, including Quorn. Premier, which posted a £54m pre-tax loss for the six months to 26 June, could net more than £200m from the sale of the operation, although this is towards the top end of expectations. The proceeds would help the food maker to trim its bulging debt, which has been averaging £1.6bn.
We tipped Premier Foods as a buy at 33p back in February, which doesn't look too clever now. And we are reluctant to give management any more credit until the disposal strategy shows some results.
While Premier Foods now trades on a meagre price-to-earnings ratio of 3.6, we do not believe it is out of the woods yet. In addition to all that debt, the company has to reduce its bulging pensions deficit of £431m, and sorting out both will be severely testing.
If disposals are not achieved, Shore Capital believes "another deep discounted equity issue" may be needed. There has already been one cash call, which raised £379m last year. All this comes as British households prepare to tighten spending on the company's marque brands in favour of cheaper options. It is time to put Premier Foods' shares back on the shelf, so sell.
Our view: Buy
Share price: 738p (-10p)
The financial havoc that has hit the Western world in recent years has caused much damage but, on the plus side, for some companies it has also left valuations well below previous levels and spurred on the mergers and acquisitions (M&A) market.
The engineering and design outfit WS Atkins became the latest to enter the fray yesterday, confirming that it is spending $280m on its US peer PBSJ – a company that provides a whole host of engineering services.
In the year to September 2009, PBSJ, headquartered in Tampa, Florida, made $47m (£30m) before interest, tax, depreciation and amortisation on gross revenue of $799m. A foray into M&A is never risk-free, of course, and Atkins's shareholders will be hoping the move doesn't hit the impressive performance of the group's shares over the past six months, which has produced a hike of 20-plus per cent.
The last financial update from Atkins came back in August when it said it was trading in line with expectations. It said the mixed nature of its business, and its international outlook, provided a degree of "resilience" as it prepared "for a period of tighter UK government spending".
We rather like Atkins and, not that we're in the business of saying "We told you so", but this column backed the stock at 571.5p back in February. Despite the improved share performance, on a forecast multiple of 7.1 times full-year earnings, the stock is still inexpensive. The yield of more than 4 per cent is also healthy. We're happy to continue being supporters. Buy.
Our view: Buy
Share price: 62p (-2p)
The Alternative Investment Market (Aim) may have taken a bit of a knock in recent times, but there is still the odd gem squirrelled away among the vast array of small- to medium-sized companies that make their home there.
AssetCo could be one of them. The company supplies equipment for the London and Lincolnshire fire services, including engines, hoses and other paraphernalia required for putting out fires and for rescuing people.
It is also mandated to step in and supply staff and equipment in the event of major incidents. These could include a strike (AssetCo is effectively the modern equivalent of the famous Green Goddess engines), a terrorist attack or the Olympics. The contracts are long-term and so should be resilient in the face of spending cuts.
So successful has the formula been that AssetCo is now selling it overseas: it supplies firefighters to Abu Dhabi's air force and is also project managing the construction of a "disaster city" training area. Make this a success and more could easily follow from that part of the world. The house has AssetCo on a modest multiple of 7.6 times full-year earnings, with a yield of 4.7 per cent. The latter is impressive for AIM, so the stock is a buy.
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