Premier Foods' "exceedingly good" results

Re-launching its famous Mr Kipling brand of cakes during the second half of 2014 teed up Premier Foods for a strong fourth quarter. Full-year profits met expectations and the huge debt pile is tipped to fall sharply in 2015. House broker Jefferies called it a "Q4 IMS-on-steroids". Premier shares surged by 10% on the news, but sales must keep climbing to underpin further gains.

Trading profit of £131 million, a £4 million drop in adjusted pre-tax profit to £77.1 million, adjusted earnings per share (EPS) of 8.6p and net debt down almost a third to £568 million were all pretty much in line with estimates. The pension deficit has nearly halved, too. Confirmation that Premier registered its highest quarterly market share for three years and highest December share for four years is an obvious boost. Thank you "stand-out performer" Mr Kipling, where sales jumped 28% in December.

Of course, the balance sheet still raises issues despite last year's rights issue. As our resident stockpicker Edmond Jackson pointed out in December, there is still over £700 million of goodwill on the books and over half-a-billion pounds of intangible assets following a series of acquisitions. "The crux for Premier's risk/reward profile is whether sustainable sales growth can be achieved in what looks like a three-year grace period now debts have been restructured," said Edmond. "There appears little prospect of creditors pulling the rug, but it's a tough future considering the state of the grocery trade."

And that's supported by the team at Credit Suisse. "The key to the share price probably lies in better sales driving the results, but we take encouragement from these numbers," they say.

Admittedly, the 3.5% decline in fourth-quarter sales of so-called power brands like Mr Kipling, Ambrosia, OXO, Bisto and Sharwoods, to £158.6 million was better than the 5% fall in the first nine months of the year. Yes, the City had hoped for more, but a decline in December of 2.3% at least continues the improving trend.

Total quarterly sales fell 4.6% to £255 million after a double-digit drop in non-branded revenue, so sales last year were down 5.3% at £788.5 million.

Credit Suisse keeps forecasts for the year ahead unchanged. It expects adjusted pre-tax profit of £86.9 million, giving adjusted EPS flat at 8.5p. That puts Premier shares, currently at 40p, on just 4.7 times forward earnings. That looks cheap, but conditions in the grocery market are incredibly tough and sales are tipped to remain static at least this year and next. Charging smaller firms thousands of pounds to stay on its supplier list hardly endears itself to consumers either.

Premier is changing its year-end to early April, so the next audited financial statements will be prepared to the fifteen months ended 4 April 2015.

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