Broker snap: Premier back in buying range

16th Dec 2009 09:20

Investors tucked in to Premier Foods after UBS said that after falling by a quarter over the last three months, the shares of the Mr. Kipling cakes and Sharwood sauces firm had come back into buying range.'We acknowledge a number of arguments for staying on the sidelines; a still stretched balance sheet, the low growth profile of Premier's portfolio, the drawing to a close of the big cost savings programme, a big (c£2.5bn) legacy pension liability, and, the absence of any dividend,' the broker note said, but UBS analyst Alan Erskine argues that the business is 'fundamentally sound'.Erskine sees scope for the company to boost margins, on the back of the resurgent Hovis brand, while the balance sheet issues are less of a worry when the free cash flow of around £100m a year, based on assumed earnings before interest, tax and amortisation margins of around 12%, are taken into account.'It has significant headroom on its covenants and its debt facility, the latter maturing in 2013,' Erskine notes, while a 'concentrated shareholder register base is likely to ensure financial discipline and a focus on value creation.'While upgrading the stock to 'buy' from 'neutral', the broker has trimmed its price target by a couple of pence to 41p, based on a projected enterprise value/earnings before interest, tax, depreciation and amortisation multiple of 6.5.