Picking shares that are worth buying at the moment is a real minefield as the situation with Covid-19 is changing all the time. It would be very easy just to sit here and say ‘sell everything’ and there are, of course, some companies out there that genuinely are sells/shorts and which are going to be badly hit and may not survive, but the majority will eventually recover once this virus subsides in the coming months, or when a vaccine is found. So rather than looking at what to sell – most of the sectors that I normally concentrate on, oil and mining, would fall into that category for most companies within them! – I’ve been wracking my brains at what might be worth buying. Although I mainly stick to natural resources companies, I do actually follow the wider market in general, and I think that Premier Foods (PFD) could do okay from this crisis performance-wise, but also see it as having relatively low risks as well – which is just as important when considering buying anything at the moment...
Like pretty much every share on the market it has dropped in recent weeks, and its shares now trade at 24.5p, compared to the 12 month closing high of 45.9p which it hit in mid-January, and that values the company at £208 million. One of my main reasons for choosing Premier Foods as a potential buy at this level is that I can see high demand for some of its product ranges, and people still need to eat even if they are ordering food online rather than going to the supermarket. It sells a number of ranges which provide various cooking sauces – including Homepride, Loyd Grossman and Sharwood’s, which are used for making the type of dishes from around the world that we are now accustomed to eating on a regular basis. With people now unable to go to their local Indian or Chinese restaurant, or whatever type of food they normally eat out and with many trying to limit how often food is delivered to their homes, not to mention financial concerns, I see this as becoming a much more popular option.
Of course, some will cook these dishes from scratch, but that is assuming that you can even get the ingredients that you need - especially with supermarkets limiting the total number of items you can order for one delivery (Tesco is now a maximum of 80 items) - and tipping a jar of sauce onto some chicken is a lot easier if people still want their curry fix! It is actually something I recently thought about whilst putting through a Tesco order - with a delivery slot three weeks away - and trying to pick out essential items whilst still managing to eat the things that I enjoy, ending up with a number of jars of sauce in my basket. I’m not just talking about cooking sauces, but across the company's entire range – although there are too many products to analyse each individually, and the sauce example stood out for me, although there are also others such as Nissin noodles which had been doing very well before this. Obviously there are other considerations, such as the financial situation, and one of the negatives here is that it does have high levels of debt at £470 million – although that is more than £38 million lower than 12 months prior to that.
It was also expecting to have reduced that debt to 3x EBITDA by now, and did have a strong Q3, as well as having made a pre-tax profit of £15 million for the six months up to September 28 2019. That equated to an EPS of 1.5p, so assuming that it has recorded at least a similar level for H2, and given that the most recent trading update suggests that to be the case, plus cost saving initiatives in place, the PE ratio certainly looks reasonable, and it has also seen growth. Most of its debt is in the form of £300 million in senior secured notes at a 6.5% coupon with a due date of October 2023, plus £210 million of floating notes due in July 2022. It does also have an undrawn revolving credit facility in place for £177 million, and the net debt/EBITDA covenants that are in place relate to that facility. Obviously this level of debt is far from ideal for a company of this size, but it is now profitable and seems to have been making good progress, both in terms of increasing sales and also reducing its costs, so I don’t see it becoming a major issue as long as it can stay within the covenants, and providing that the markets have improved when it comes to having to refinance it (as it successfully did with a previous £325 million note back in June 2018, to extend the maturity by a couple of years). At the recent share price peak I certainly wouldn’t have been rushing out to buy this share, but at the current share price of around half that I can see value, even if just holding until the markets really start to recover.
Filed under: Premier Foods, Imperial Brands, Royal Dutch Shell, Quixant, Big Sofa, Zenith Energy
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