Premier Group is a brand well known to consumers and shoppers in South Africa — but it has been a little more scarce on investor shelves.
The group is one of South Africa’s oldest companies — it started as a bakery in Cape Town in 1824 and today produces and markets iconic South African brands such as Snowflake flour, Blue Ribbon bread, Iwisa and Nyala maize, Manhattan and Mister Sweet confectionery and personal care products Lil-lets. Premier has a No 1 market share in flour and No 2 positions in bread, confectionery and maize.
The company listed on the JSE in 1960 and delisted in 2005. That shroud lifted in late 2022, when majority shareholder, the private equity investor Brait, decided to list part of its stake in Premier on the JSE to reduce term debt.
The first plan to re-list in December 2022 stalled due to unconducive capital markets and saw Brait pull the listing. Instead, Christo Wiese’s Titan Investments and RMB stepped in to spend billions, taking a stake in the foods company.
A second stab at a listing in March 2023 was more warmly received with institutions ending up with 21% of Premier, Wiese owning 31% and Brait 47%. The placement was undertaken at R53.82 a share. The listing raised R3.6bn with a somewhat eyebrow raising R950m pre-IPO return of capital distribution paid by Premier back to Brait. That transaction added to Premier’s debt pile.
The tight ownership structure of Premier has hampered tradability of the R7.8bn mid-cap, though on the interim results call, management indicated Wiese was prepared to provide liquidity should there be market interest.
Premier, year to date, has seen a return of -1% and is trading at R63. Hardly enthralling, but relative to the mauling seen at Tiger Brands (-19%), Libstar (-47%) and RCL Foods (-16%), investors would have been chastened at such steadfast if dour performance from Premier.
As this article was written, IM had just come off the interim results call with management for interim results ended September 2023. For the six months, despite a challenging consumer economic environment beset by disruptive and costly load-shedding, Premier grew revenue by 7.1% to R9.4bn with the main growth coming from the dominant Millbake division (which comprises 84% of sales) followed by groceries & international at 10% and personal care at 4%.
Millbake had an 8% rise in revenue but a 27% increase in ebitda as efficiencies and improvements from the bakeries businesses powered results. The smaller businesses had a modest decline in profitability. Ebitda margin rose from to 10.9% from a comparative 9.4% and management were confident that this margin would be maintained for the full year.
One feature of results was the 34% increase in finance costs to R212m, fattened by rising interest rates and the cost of the R950m Brait pay-out. However, management stated strong cash generation would result in Brait pay-out debt being expunged by the end of the year, reducing financed costs by about R40m for the period.
For the interims, normalised headline earnings rose 25% to 331c a share with Premier reporting headline earnings of 633c a share for financial 2023. This places the stock on a historic earnings multiple of 9.5 times. No dividend was declared, though management aimed to pay a dividend at year-end results.
For a bread business, with few leading power brands in the key grocery category, that may seem a fair price to some. IM recognises that Premier management has a desire to grow the groceries and international segment of their business and are open to the right deals. A reduction in debt could facilitate such moves. Further, the 2021 acquisition of Mr Sweet to bulk up Manhattan has scope to further push sales and market share.
The interim results were pleasing — management has a continued the integration, efficiency and optimisation within its bakery and confectionary brands.
With a competitive landscape in bread, margin can only be gained from a declining wheat price. Year to date the wheat price is down 11% and that fall has offset much of the higher energy costs and toasted group margin. With global grains in a far more subdued position owing to the Russian-Ukrainian war and a good wheat harvest anticipated in the country, Premier should have some steam in its oven in the months ahead from a lower input cost.
It would be remiss not to mention the elephant in the room. IM realises that with both Wiese and Brait looking to offload stock either to raise funds and/or improve liquidity, there could be an unsettling period ahead.
The Premier share price has a been trapped in a narrow trading band since listing. Perhaps a shake-up is needed and, once undertaken, the underlying sound fundamentals of Premier can shine rather than be overshadowed by capital uncertainty. Premier clearly has scope to re-rate from current levels.
Given all the food poisoning in the food producers sector in 2023, IM feels Premier has yet to see its full rise. In a first company review, IM places a buy on the stock with a target price of R72.
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