Sunday, January 22, 2012

PFD - Premier Food

PFD operate in the food product sector, with over 40 brands. It has 8 “power brands”: Hovis, Ambrosia, Mr. Kipling, Sharwood's, Loyd Grossman, Bisto, Oxo and Batchelors.

As at 22-Jan-2012, it is trading at 7.71p, with a market cap of £185m, on a PER of 3.44. In its sector, the average PE is 12.6, and EV/Sales is 3.1, compared with PFD, which is 0.5. Clearly, something is very wrong with this picture, and there’s no prizes for guessing the cause: it has net debt of £1.1b. Based on FY2010, PFD has P/FCF of 1.5, which looks great. Factoring in the net debt of 1261m, though, its EV/FCF is 11.9 - I would hope for a max of 10. The situation has deteriorated in 2011H2, where it produced negative net cash flow. Operating cash flows were down a lot, and interest payments were down a little - hence the negative net cash flow (before capex, I might emphasise).  

On 19-Jan-2012, Fitch downgraded its debt from BB- to B+. “The downgrade reflects a lowering of Fitch's EBITDA expectations for 2011 and beyond, the ongoing tough UK retail environment which is translating into continued price pressure on food manufacturers, as well as the uncertainties arising from the current debt renegotiation and its terms.” Oh dear.

TMF is running a thread ( on PFD. It contains a lot more detail than I’m presenting here. Quality stuff.

Some positive news is that the company is selling of some its peripheral brands, the debt convenants have been shifted to March (they would have failed if tested in Dec 2011), they are axing 600 jobs, and they expect cost savings to increase from £20m to £40m. In their interim results published 05-Aug-2011, they reported net debt of 1139m, down from 1261m when they reported on 15-Feb-2011. Their debt seems to have topped out in their 28-Aug-2008 report, which was at 1805m. So debt is going down. The banks also seem to be a little bit flexible when it comes to loan negotiation.

PFD does have some strong brands, so it’s not in a structural decline like HMV. The really worrying thing, though, is that in their last set of interims, operating cashflow was 28m, against interest payments of 46m. The comparables last year were 83m and 50m, respectively. So the big question is: is the reduction in cashflow permanent, or a temporary blip? If it can’t restore its cashflow to cover interest payments, then it will be curtains

This company is a clear case of aggressive expansion using a mountain of debt, with inevitable collapse when the landscape changed. I dare say that the proceeds of disposal will be less than the purchase, due to the distressed nature of the sales. Buy high, sell low. On 08-Dec-2011, f PFD agreed to sell Brookes Avana to 2 Sisters Food for £30m. For y/e/ 31-Dec-2010 Brookes had a turnover of 204m, and a trading loss of 0.1m. That should wipe a little more off the debt, but it doesn’t look like it will improve their operating cashflows that much.

It will be interesting to see how this unfolds; from a safe distance, of course.

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