Credit analysis of premier foods plc

Executive Summary
This report will aim to look in to the financial performance and position of Premier Foods
PLC with respect to their profitability, liquidity, solvency and cash generating capability
in order to determine whether lending a 5-year bank loan to this company is a viable
decision. The analysis will utilise information from the company financial statements
across a five year period from 2015 to 2020. This information will then be assessed
relative to company performance over time and against peers in order to obtain a
comprehensive analysis of the current debt position and repayment abilities of the
company.

It will further examine the quality of the earnings and financial statements used in
obtaining data and provide insight into the strengths and weaknesses observed in
creating the report.

From the analysis it will be concluded that while the company has shown a satisfactory
performance for FY2020, it appears as a one-off performance mainly driven by the
lockdown restrictions placed in the early part of the year. The COVID-19 pandemic
adversely impacted many industries across the globe, leading to lower share price
performances. However,
one industry that saw
88.44
favourable share price
movements this year was
the grocery industry as
consumers were forced to
have home cooked meals.
So while the industry as a
38.34
whole did well in FY2020,
even Premier Foods PLC was able to convert their previous losses into profits. This was
reflected in their share price which was on average below £50 across the past five years,
increasing quite steeply in 2020 recording an overall growth of 130.13%.

Thus it further cements the concern the report highlights throughout as the pandemic
being the driver of the increased performance recorded in FY2020.

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Table of Contents

Content Page Number

Introduction 4
Financial Analysis 5
Quality Assessment 11
Recommendation 12
Reflection on Report Strength and 13
Weakness
References 14

Brands sold by Premier Foods PLC

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Introduction
Premier Foods PLC is incorporated within England and Wales with their Principal Activity
being the “manufacture and distribution of branded and own-label products”.

Their business model consists of the following segments:

1. Grocery: cooking sauces, flavours, seasonings, quick meals, soups and desserts
2. Sweet Treats: cake brands such as Mr Kipling, Cadbury and Lyons
3. International: Ireland, Australia
4. Knighton Foods Ltd (fully owned subsidiary)

With regards to financial reporting purposes the International and Knighton Foods
segment performance has been consolidated into the Grocery sector as their individual
revenue is below 10% of the Group’s total revenue.

While the supply chain is mainly Ma in re ve nue m a rk e t s - FY 2020

concentrated on British suppliers,
UK Europe Rest of the world
925

803.8
revenue data over the past 5 years

770.8
758.1
745.7
735.5

suggest that UK is also their main

geographic market in terms of sales.
The main drivers of performance in
33.5
27.6

27.4
26.1
23.4

22.8
21.9

21.3
18.8
17.4
15.9

markets such as Australia has been

22
due to brands of Cadbury and 2015 2016 2017 2018 2019 2020

Sharwood Sauces among others. The future of their strategic partnership with Cadbury
through Mondelez International has been renewed in 2017 up until 2022 with a right to a
3 year extension. So the sustainability of such performance into the long run seems
most likely provided an effective management under the new management change.

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Financial Analysis
The top line of the income statement
Revenue Composition - 2020
has increased by 2.8% from FY2019
Grocery Sweet Treats
but if we examine revenue over a 5
year period from FY2015, we see
revenue facing an overall decline of 28%

12%. In terms of segmental

performance, the Grocery sector is
the main driver of revenue across all 72%

years but the YoY growth for Sweet

Treats has increased above that of
Grocery since FY2019, driven by the performance of the brand “Mr Kipling”. The
company utilises a brand growth model strategy which increases the leverage of the
well-known brands through advertising, retail partnerships and innovation.

In terms of innovation on the product range FY2020 saw the introduction of

“PLANTASTIC” offering consumers a more health conscious product. In a year of a
pandemic, where the notion of healthy eating has become paramount, this is a profitable
innovation by the company which they can hope to exploit in future years.

According to the Chairman, the revenue of the group increased substantially during
March 2020. This would be explained by the implementation of the first lockdown in UK
from March 23 leading consumers to stock their food cabinets creating an unexpected
surge in demand. This increase in revenue did ultimately increase the overall profitability
of the company generating a Net Profit Margin of 5.49% which is a significant increase
from the loss of £33.80mn in FY2019.

The Chief Executive Officer attributes the surge in sales during FY2020 to the decline in
consumers eating out given the pandemic restrictions, but a noteworthy concern here is
whether this trend is sustainable. After months of being cooped up in their homes,
consumers might want to do more outdoor dining after lockdown lifts. While it may not
be a permanent drop in demand, it would at least impact the results in the quarter that
economies shift into lower restrictions. So it’s imperative that the company has enough -
cash retained from FY2020, in order to finance their operations in such a scenario.

Relative to peers Premier Foods PLC has reported both a higher GPM and OPM which a
significant achievement given than Cranswick reports revenue that is £819.9mn greater

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than that of Premier Foods indicating a more efficient management of both cost of sales
and operating expenses.

Despite the marginal growth of 2.77% in GPM, operating profit margin grew significantly
from 0.55% to 11.25% in FY2020, which is possibly due to the YoY reduction in
administration expenses during FY2020 by 51%. On examining the breakdown it can be
observed that the decrease resulted from the YoY decrease in amortisation expenses by
15% and employee benefit expense by 17% among others. While the latter could be due
to the consolidation of the three Defined Benefit Schemes of the company under one
trust this year, the former increase in profits would raise concerns, since the income has
been generated by the lowering of estimated expenses and not cash expenditures. Given
the subjectivity involved with amortisation it is important to determine if the increased
profits of FY2020 are equivalently backed by cash.

The reduction in their net debt by 8.6% in FY2020 must have been instrumental in
generating a 22.2% YoY decrease in the company’s finance cost. This and the increase in
operating profits helped increase
YoY Growth in Total Finance Cost
their interest coverage to 2.16
20.0% 12.5%
times which is a YoY increase of 7.3%
10.0%
0.0% -2.3%
26.23% from FY2019. The 0.0%
2015 2016 2017 2018 2019 2020
company provided a satisfactory -10.0%
-22.2%
and higher interest coverage of -20.0%
-30.0%
2.76 times under their cash
-40.0%
based coverage. Indicating that -41.7%
-50.0%
their cash generated from
operations are quite adequate to satisfy the existing interest obligation almost 3 times
over. In comparison with Greencore PLC who shares a similar debt position to that of
Premier Foods PLC, this is a much higher coverage.

The company’s ROE of 2.77% is a YoY growth of 21.16% from FY2019. The Du Pont
Analysis, analyses the NPM, Asset Turnover and Financial Leverage to identify what
exactly drove the performance in FY2020. Asset Turnover has declined indicating that
assets are less efficient in generating revenue for the company. If the asset growth for
FY2020 (36%) is compared to 2.77% revenue growth the company managed to achieve,
it highlights the need for a more efficient management and utilisation of the company’s
asset base to further generate revenue. With the decline in financial leverage, it is
evident the increase in NPM is what drove the ROE in FY2020.

The receivable growth for the company has been constantly higher than revenue growth
since late FY2017, until later this year. A company that has a higher receivable growth

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above that of its revenue may be reporting revenue that has not yet realised. While this
may look favourable in terms of profitability, it signals problems in liquidity.

In addition, it must be noted that a majority of the company sales are said to be
concentrated upon a smaller number of customers. Such dependency is likely to increase
the credit risk of Premier Foods, despite their notes to accounts claiming that this group
of receivables are of a low credit risk.

In analysing the liquidity of Premier Foods PLC, the current ratio and acid test ratio is
examined. The former indicates that the company has 0.98 short term resources for
every short term obligation which is a 24.82% YoY increase driven by the 540% increase
in cash and cash equivalents. The acid test ratio excludes inventory to examine the
immediately available
short-term resources and Revenue Growth against Assets and Trade
Receivables
has managed a YoY
40%
increase of 65.75%. The 30%
marginal difference 20%
10%
between current ratio and 0%
-10% 2016 2017 2018 2019 2020
acid test ratio ensures that -20%
inventory is not a driver of -30%
-40%
their liquidity which is a
Asset Growth Receivable growth Revenue Growth
positive aspect since
inventory would be the least liquid current asset. Generally, companies are to have a
current ratio between 1.5:1 and 2:1 and an acid test ratio of 1:1. However, these results
are allowed to fluctuate based on industry standards. Thus, in comparing Premier Foods
with competitors such as Cranswick PLC and Greencore PLC, it can be seen that both
Greencore PLC and Premier tend to have almost similar results, while Cranswick offers a
higher liquidity position which can be simply due to its higher revenue generation.

To obtain an overall picture of the liquidity and efficient management of their short term
resources, the cash conversion cycle is used. Premier Foods is able to convert both
inventory and trade 140.0 127.8
receivables into cash 120.0
102.3
100.0
much faster than both
80.0 66.7
of its peers. However, if 54.1
Days

60.0 45.2 46.8 48.5 45.5

the YoY inventory 40.0 27.6
20.0
holding days are
-
compared it can be seen Premier Foods PLC Cranswick PLC Greencore Group
PLC
that FY2020 faced a
Inventory Days Trade Receivable Days Trade Payable Days
decrease of 13.71%

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from FY2019 but it was a general upward trend from FY2015 to FY2019, with inventory
days increasing by 31.46% over the four year period. The decrease specific to this year
is attributed to the surge in demand due to COVID and lockdown restrictions leading
consumes to stock their groceries and hence portrays the efficient management of
inventory as a one-off event in FY2020.

They take longer to settle their trade payables at an average of 102 days while
Cranswick PLC does so in a much lower time span. Such delays in payment would mean
that Premier Foods has the cash for a longer period, but at the same time, a persistent
record of late payments since FY2018 may adversely impact the supplier relationships of
the company. So while they claim to be socially responsible by sourcing their products
from local suppliers, are they simply exploiting local suppliers with their size
advantages?

For the purposes of a credit analysis, it is imperative that the solvency or simply put, the
ability of a company to meet its long term obligations is analysed. Premier Foods PLC
has being highlighted in financial magazines such as FT in recent times for its major debt
burden, with a net debt of £429.6 being reported for FY2020. Despite the YoY decrease
of 8.6% from FY2019, their net debt stands out among competitors such as Cranswick
and Greencore PLC.

The company was set a target of 3x for their Net Debt/EBITDA. They were successful in
achieving this target in FY2020 with a result of 2.97x. While this is relatively lower than
that of Cranswick PLC, Premier Foods seems to be able to repay their debt much faster
than Greencore PLC. In
considering the capital Long-Term Debt

structure of the company 250.00%

204.66%
it can be seen through 200.00%
their Debt-Equity ratio 150.00% 120.34%
132.23%
106.90% 105.83%
that the company was 100.00%
57.78% 49.00% 50.70% 59.85%
majorly financed by debt 46.37% 45.67%
50.00% 33.18%
from FY2015 up until 0.00%
2015 2016 2017 2018 2019 2020
FY2019. In FY2020, the
company was able to L/T Debt/Equity L/T Debt/Assets

reduce their reliance on debt with a ratio of 65.10% which was a decrease of 38.5% YoY.
This indicates a lower gearing for FY2020 but an additional loan would raise this figure
up in the future. Since the sale of their stake in Hovis (associate) four years ago, the
company has been able to set out on a trend in decreasing their long-term debt as a
proportion to both equity and assets.

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As a potential creditor, one of the main concerns will be the ability of Premier Foods to
meet their repayment obligations and the associated financial risk of the company. Cash
from operations grew by a significant 48.87% in FY2020, while total cash and cash
equivalents grew by £150.10mn from FY2019. This growth was driven by borrowings of
£85mn and £85.9mn in cash generated from operations. If we consider the debt
coverage of the company which indicates how well the company can service their debt
repayments through cash from operations, it has increased consistently since FY2016
with a YoY growth of 48.87% in FY2020. In addition to the operating profit that
increased by 2018% YoY in FY2020, this increase could be due to the decrease in
inventories, decrease in trade receivables and the increase in trade payables during the
year.

At this point it could be observed if payment to trade payables were delayed on purpose
so as to showcase a higher cash from operations in order to convince shareholders of
their better ability to meet debt covenants in addition to the decrease in borrowing, so
as to instil a positive aspect of their performance within market expectations.

Despite the 12.59% YoY growth in FCFF and CFO

decrease of Free Cash 60.00%
Flow to the firm in 40.00%
20.00%
FY2019, the company was
0.00%
able to increase it by a -20.00% 2017 2018 2019 2020

substantial YoY growth of -40.00%

65.6% in FY2020. This -60.00%
-80.00%
increase was mainly
driven by the increased YoY -CFO YoY-FCFF

cash generated from operations. The increase in operating cash flow and FCFF could be
mainly due to the positive impact COVID restrictions had during the year on Premier
Foods PLC in them being able to convert their inventory and trade receivables at a much
faster rate. The point of concern is whether this increased demand faced under
lockdown restrictions will continue in to FY2021 or will consumers switch back to pre-
COVID consumption patterns. This uncertainty would not have been as vital if the
company performance had been persistently good across the five year period examined.
But the analysis had repeatedly highlighted the increase in performance experienced was
specific to FY2020.

Despite having a high debt burden in the early years, the company is back on track in
being less leveraged by having reduced their debt exposure. It is worthwhile in
considering the maturity structure of existing debt where majority of their debt is to
mature in 3-4 years, which means an addition of a five year loan will press further

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pressure on to their repayment abilities going forward as majority of the existing debt
will still be present.

Maturity of Debt
350 300
300
244.8
250 210
200
150
100 85
50 2.5 2.2 0.2 1.9 1.9 11
0
Within one year 1 - 2 years 2-3 years 3-4 years 4-5 years Over 5 Years

Trade and Other Payables Senior Fixed secured notes

Senior floating secured notes Secured senior credit facility-revolving
Finance lease obligations

The Altman’s Z-Score helps analyse the potential for a firm to go bankrupt in the next
two years with companies that have a Z-score of less than 1.81 being at a higher risk of
doing so. The calculations revealed that Premier Foods PLC has a Z-Score of 0.64 clearly
putting them in the distress zone relative to its peers who were either in safe zones
(Cranswick PLC) or in distress but with a score higher than 1(Greencore PLC). In
addition, credit ratings provided by S&P and Moody’s put the company within the non-
investment grade and hence indicates S&P B+

the company to be of a relatively high Moody's B1

risk and on average to be one with a higher potential for default.

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Quality Assessment
The quality of reported earnings can be assessed by measuring operating cash flow
against operating profit. 1400.00% 1282.22%
Premier Foods PLC has 1200.00%
1000.00%
constantly maintained this
800.00%
ratio below 100% indicating 600.00%
that for every pound of 400.00%
175.05%
operating profit they report 200.00% 60.16% 75.61% 90.14%
-7.71%
0.00%
they have less cash being 2015 2016 2017 2018 2019 2020
-200.00%
generated from the
Operating Cash Flow/Revenue
operations. This brings us to
Operating Cash Flow to Operating Profit
the conclusion that while the
company reported a higher operating profit in FY2020, the cash generated was not
equivalent. This could be from the fact that the operating profit increase in FY2020 was
driven mainly from the decline in operating expenses; namely decline in amortisation
which is a subjective estimate not incorporated within operating cash flow.

With regards to the sustainability of earnings, under their brand growth model, in
FY2020, they have invested in a production line at the Stoke cake manufacturing site in
order to sustain their innovation and income generating capabilities for the forthcoming
year. Yet, as far as trend analysis goes, it has been quite clear that the improved
performance in FY2020 was driven by COVID-19 restrictions. So in terms of
sustainability, earnings quality is low

The audit reports states a clean opinion and the financial reporting with concerns to
depreciation methods, inventory recognition and sales recognition have been constant
throughout the five year period examined. Thus concluding that the financial reporting
quality is high. However, it would have been much helpful for investors and lenders alike
if the company has provided some indication for their outlook in FY2021, such as their
strategies to ensure the increased revenue is sustained for the forthcoming years.

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Recommendation
Many economies and industries had to bear the brunt of declining revenues and growth
in the wake of COVID, yet the grocery sector was one of the few industries that faced
increasing revenues as consumers chose to eat home cooked meals. In singling out the
performance of Premier Foods PLC for FY2020, we can see it to have been significantly
better than its preceding years and competitors in terms of profitability and working
capital management.

However, the company will have to make allowances for the impending impacts that the
BREXIT transition would bring and the resulting foreign currency effects for the Euro in
addition to how the business environment will look going forward amidst COVID. So with
the future performance hanging on so many uncertain elements, a credit investor would
look forth to the credit ratings provided to the company and their existing cash
generation to ascertain the ability of the company to meet debt obligations. The non-
investment grade rating is not promising especially with a Z-Score that puts the
company in a distress zone. Therefore, the financial risk and the ability of the company
to make good on its debt obligations is not promising given its existing debt is due to
mature in 3 -4 years.

Considering all the above factors as well as the market data analysed during the course
of the analysis, it can be recommended for a potential creditor to not lend a 5-year
bank loan to Premier Foods PLC.

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Report Strengths and Weaknesses
The information for the analysis has mainly of a historical nature. While it does depict
the performance of the company across the years, it in no way guarantees a similar
performance for the forthcoming years. Moreover the existence of a pandemic further
increases the uncertainty surrounding these businesses.

The report does constitute analysis with peers. Greencore is similar to Premier Foods in
terms of revenue and debt, Cranswick PLC has a much larger market capitalization than
Premier Foods PLC which may affect effective comparisons between companies.

External credit ratings have been included along with credit measures such as Altman Z-
Score and other financial ratios to give the creditor an understanding of the financial risk
of the company in the forthcoming years in order to make up for the lack of forecasted
cash flows in order to ascertain if the business will have adequate cash from operations
to meet their debt repayments and interest obligations.

In order to assure the lender of the quality of the financial reporting and the earnings, a
quality assessment has been conducted with attention to both the variability of cash and
earnings and if the earnings presented on the face of the income statement are in fact
backed up by cash.

This report is limited by the fact that the potential loan amount is unknown and neither
its purpose in order to ascertain the period over which returns can be expected to be
realised, or by how much this loan will increase the company’s existing repayment and
interest obligations. For instance, a significant loan amount would deteriorate the
company’s Net Debt/EBITDA target in addition to increasing the existing financial risk,
throwing the company into further distress.

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References
 Cranswick PLC. Company Annual Report. [Online]Available at:<
https://cranswick.plc.uk/investors/report-accounts>[Accessed 20 November
2020]
 Ft.com.2020.Hovis bought by private equity firm Endless after bidding war.
[online] Available at <https://www.ft.com/content/a41af71c-06ec-4351-8a05-
761825ef8390>[Accessed 23 November 2020]
 Ft.com. 2020. Premier Foods Upbeat As Lockdown Boosts Demand. [online]
Available at: <https://www.ft.com/content/607fabac-5230-46bc-a8cb-
d1705c630206> [Accessed 26 November 2020].
 Greencore PLC. Company Annual Report.[Online]Available at:<
https://www.greencore.com/investor-relations/results-centre/> [Accessed 20
November 2020]
 Markets.ft.com. 2020. Premier Foods PLC, PFD: LSE Interactive Chart - FT.Com.
[online] Available at: <https://markets.ft.com/data/equities/tearsheet/charts?
s=PFD:LSE> [Accessed 27 November 2020].
 Premier Foods PLC. Company Annual Report. [online]Available at :<
https://www.premierfoods.co.uk/Investors/Results-Centre.aspx> [Accessed 18
November 2020].
 Viewer, A., 2020. Five Year Forecast: The Grocery Market By 2021. [online]
Igd.com. Available at: <https://www.igd.com/articles/article-viewer/t/five-year-
forecast-the-grocery-market-by-2021/i/15982> [Accessed 20 November 2020].

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