When Gavin Darby became chief executive of Premier Foods in February 2013, the company was in serious financial difficulties. It was weighed down by net debt of nearly £1 billion — a multiple of roughly six times its underlying earnings — and the task he faced was, to say the least, a challenging one (Dominic Walsh writes).
Next week’s annual meeting has effectively become an opportunity for investors in the maker of Mr Kipling cakes and Ambrosia custard to decide whether or not they believe the turnaround wrought by the former Coca-Cola and Vodafone executive has worked.
Leading the charge against him are Oasis Management, a Hong Kong-based hedge fund that has just upped its stake in Premier to 17.3 per cent, and the New York-based Paulson & Co, which has a 6.1 per cent stake. Although the intentions of the other institutional shareholders are less clear, observers reckon there may be as much as a 40 per cent vote against Mr Darby’s re-election.
Keith Hamill, Premier’s chairman, and the rest of the board are adamant that their chief executive is doing a good job. Their view is that he has successfully transformed Premier despite a challenging industry backdrop. In particular, they point to strategic partnerships with Nissin Foods of Japan for noodles (it also bought a 20 per cent stake in Premier) and Mondelez International on Cadbury cakes. Those two partnerships created an additional £87 million of revenues last year. The step-up on innovation has translated to some of Premier’s more dated brands. So Oxo now sells a fresh gravy, Mr Kipling can be bought as single-serve slices and Angel Delight dessert has a readymade version that helped the brand lift sales by 11 per cent.
All of which, as the company points out, is contributing to “good progress” in its financial performance, with sales in the most recent financial year growing at their strongest rate in more than five years and international revenues up 25 per cent. This, in turn, has helped bring Premier’s net debt down to a multiple of 3.6 times earnings while the board expects the ratio to be below three times earnings by March 2020, ahead of the previous estimate. The problem for Mr Darby is that the initiatives he continues to push through take time to produce material results and hedge funds are not known for their patience. Debt may be coming down steadily but the company won’t be paying a dividend until its debt ratio comes down to three.
The activists argue that the pace of change under Mr Darby has been pedestrian and a major sticking point is what they perceive as his unwillingness to consider strategic disposals to enable the company to speed up its debt reduction and fund a cash injection into its pension fund. They cite Batchelors as a brand that could fetch £200 million, although Premier insists that when it explored options for the brand it couldn’t find a buyer willing to stump up, and the brand’s sales are back on the up.
The debate over the merits of Mr Darby’s stewardship will doubtless continue to rage right up until next Wednesday’s vote, with three big shareholder advisory firms — ISS, Glass Lewis and Pirc — together with Premier’s pension fund trustees all backing his re-election. Whether or not he survives, one thing that he will forever be associated with is the rejection two years ago of an indicative 65p-a-share offer from McCormick, the American spices company, and the sale of what is regarded as a poison pill stake to Nissin Foods. With the shares languishing at 46¼p, even after the activist-inspired spike, it looks likely to remain a bone of contention.
ADVICE Hold
WHY Whatever the outcome of the annual meeting, the noise surrounding the food group will continue
Kier Group
Shares in Kier Group, the FTSE 250 construction and services group, have been under pressure in recent months as the collapse of Carillion in January fuelled fears over the wider outsourcing sector (Emily Gosden writes).
Haydn Mursell, its chief executive, is on a mission to convince investors that Kier is a far less risky bet. Yesterday he appeared to make some progress with a trading update that sent shares up 4 per cent.
Kier employs about 21,000 people in the UK, the Middle East, Australia and Hong Kong and reported revenues of £4.3 billion in the year to June 2017. The company is in the process of restructuring itself around three core divisions — infrastructure services, which offers maintenance and some construction to the road, rail and utility sectors; buildings, which is primarily involved in construction for schools and hospitals; and developments and housing, which works on new property schemes and housebuilding.
Mr Mursell pointed out that Kier’s average construction project size is between £5 million and £10 million, which should reduce the potential for the kind of catastrophic overruns that pushed Carillion over the edge. Yesterday’s update contained several nuggets to cheer investors: Kier is on track to meet expectations for annual profits; its order book has increased; it has won a contract renewal from Highways England; and it has launched a streamlining programme. Details on it are scant but the disposal of some non-core assets is on the cards. There will be costs initially, which should be offset by savings over the year ahead, with the promise of a “material” profit and cash benefit in the year to June 2020.
The one negative was higher than expected average debt, which Kier attributed to the impact of bad weather preventing workers getting on site earlier this year. Kier has committed to ploughing its free cashflow into reducing its debt levels, which are a key cause of nervousness for investors post-Carillion.
With the collapse of Carillion likely to continue to colour sentiment in the sector for some time to come and a potentially bumpy streamlining programme to come in the months ahead, caution is recommended.
ADVICE Hold
WHY Streamlining takes time to bear fruit
