RBC Capital starts Premier Foods at ‘outperform’

The bank argued that Premier’s "lowly" valuation owes more to historical dysfunctionality than the current state of affairs.

"The last remaining historic sink-hole - an underfunded pension scheme - should be plugged by 2026," it said.

"With this removed Premier is no more, but no less, than a competently managed food producer with robust competitive positions in a (modestly) growing UK market, enjoying decent margins and cash flow."

RBC said Premier Foods has more in common with large-cap branded businesses like Nestlé than small/mid-cap UK companies it follows like Cranswick and Hilton Foods.

"Premier’s a branded food producer, albeit a much smaller one than Nestlé, and has higher branded relative market shares in the relevant categories in the UK than Nestlé does in its categories. This, to our mind, indicates a solid competitive position in categories where the main competitor is often own label, reflected in the fact that Premier is able to charge a similar price premium to other brands over own label; (we monitor this regularly)," it said.

RBC noted that Premier earns similar margins to Nestlé, and while there are some differences in the composition of the two companies P&Ls, they are relatively minor. "We find the similarities remarkable," it said.

RBC said that assuming an underlying revenue growth rate of 2.5% by 2026, flat underlying trading margins from 2024-26, terminal growth rate from 2035 of 1.5% and an 8.5% cost of equity, its adjusted present value derived price target is 180p.

"At this price, Premier would be valued at 12.8x our (calendar) 2025 earnings per share forecast, similar to Hilton Foods but still a long way below Nestlé's 18.8x," it said.