Leisure Wrap & Other:

So the trading day is grinding to a close. We’re another day older but are we any wiser? After a day of intensive head-scratching, pen flipping and gossip, we have been considering the following. As always, contact us if you’d like further details:

Premier Foods – shares still far too cheap:

• Premier Foods presented its H1 numbers ‘like a normal company’.

• This is because, essentially, the group is now a normal company.

• This will take a while to sink in but, on a PER this morning of c4x and this afternoon c4.5x, it’s shares would appear to be trading at completely the wrong level.

• Tick off the issues:

o Supermarket demand stabilising

o B2B customers cutting back on SKUs and focusing on the bigger branded suppliers

o Cooler weather being helpful

o Marketing & capital spending bearing fruit

o Overseas sales rising by 22%

o Directors have recently bought stock

o Share overhangs in the market looking as though they may have been cleared

o Debt will fall markedly (c£60m) in H2

o The pension fund deficit, at the moment, is negligible.

o Margins should rise materially in H2. Sweet treats will see its FY margin >10% from a 7.8% in H1

• The problem, perhaps, could be share of voice. There are 000s of shares out there, who needs one that has disappointed? But if you change the handle on an axe – and then you change the head, you have a new axe. Management has changed, the balance sheet has changed & products are evolving.

• Fuller meeting notes at the foot of this email.

Sharm disruption:

• Crisis developing as might be expected. Get the holidaymakers back & then a deadly hush will descend over Egyptian resorts.

• This is unhelpful for tour operators – as it leads to a rescheduling of brochures etc. and ultimately it restricts choice – but it is a bigger deal for operators in resort (hoteliers, restaurateurs and the like) than it is for tour operators in general.

• Overall it’s an ill wind but hoteliers in the Canaries are likely to see a material boost to their business.

Random information, hopefully not all of it useless (re most leisure operators etc.):

• VW offering to put $500 in the pockets of ‘cheated’ diesel car buyers. Some say too little, too late. Not sure if the offer extends to Europe at this point.

• Sterling up against the Euro, down against the US$. Betting of a Dec rate hike Stateside now firming up.

• Oil price & precious metals down. Most soft commodity prices weak, protein prices under renewed pressure. Cattle prices now down 23% over last 12mths & hog prices some 42% down.

• Soybean prices down some 22% over last year (input product & cattle food) but OJ up 6% on the last year on back of El Nino & other concerns.

• Fed rate rise in Dec now said to be firmly baked in.

• Action re Yo Sushi & potentially Gaucho Grill suggests that PE houses are ready, willing and able to fund secondary & tertiary buyouts.

• Hotel stocks down yesterday on the back of Sharm issues. Not surprising.

We’re so 21st Century, this morning’s Tweets (diff. font size denotes importance):

1. Brewdog co-founder James Watt has refuted claims his Aberdeen-based company is overvalued following its ambitious crowdfunding campaigns

2. Mayfair Equity Partners has agreed to acquire the controlling interest of 91-strong YO! Sushi from Quilvest Private Equity for c£81m

3. The government’s chief medical officer is to recommend a significant lowering of the official limits of alcohol that can be safely drunk

4. Foreign Secretary Philip Hammond has said that airport security measures must be reviewed in the aftermath of downed Russian aircraft

a. Airlines have cancelled flights to Sharm el-Sheikh until 25 November following a FCO ban on all but essential travel

5. EasyHotel announces Master Development Partnership with MAN Investments LLC in Middle East

6. Eurotunnel could take a stake in London City airport as part of a consortium after it was put up for sale this year.

7. With its China JV fresh in the mind of investors, Merlin Entertainments has appointed Yun (Rachel) Chaing to its board.

8. The Organisation for Economic Co-operation and Development has noted a ‘deeply concerning’ global slowdown in trade.

9. Premier Foods Reports Return to Growth. First time in >2yrs. Pension fund deficit currently ‘de Minimis’, debt to reduce significantly in H2

a. Premier Foods says ‘branded sales growth driven by innovation and investment’. PBT +21.6%, EPS +21.9%. Debt in line but will fall H2.

b. Premier Foods still pulling capex and marketing levers and announces the introduction of a new brand; Paul Hollywood premium baking mixes

c. PFD outlook. Says ‘in Q3, we expect to deliver positive Group branded sales growth, with Sweet Treats performing more strongly than Grocery.’

d. PFD longer term expects ‘to deliver branded sales growth for the Group of 1-2% in FY16/17 and the medium term’.

e. PFD has had a torrid time of it. Restructured balance sheet April 2014 but then faced of grocery price war. Now back in growth

f. PFD. What’s wrong in this sentence, PFD in growth, debt to fall significantly, pension deficit near zero, H2 improvement expected, PER 4x?

g. PFD catalysts? Growth, reinstated dividend or less excitingly realisation that it has a future as well as a past. It’s achieved 1 + 3

Premier Foods H1 analysts’ meeting:

• See summary notes at head of email. Fuller notes below:

First Half Results Presentation:

10 Nov 2015:

Presentation:

Gavin Darby:

• First new brand in 20yrs with Paul Hollywood.

Alastair Murray:

• Excited about the top line. First growth in 2yrs. Non-branded sales were actually very strong, up 10.6% in Q2.

• Underlying trading profit up around 2.5%. Headline a little higher due to the phasing of consumer marketing. Q3 spend will be circa Q1 + Q2 combined.

• Grocery was +3.2%. Bisto & Oxo strong. Sauces good. Even Batchelors. Latter still negative but trends better.

• Sweet treats was actually down 2.6% in Q2 but this is against tough comps & there is some ‘promotional phasing’. Q3 should be very good. Non-branded was +18.7% in Q2. E.g. mince pies. Good for margin & utilisation. Margin gone from 5.2% to 7.8%. Should get to double digits by year end.

• Healthy swing in underlying profits, better yet in headline. EPS 2.2p to 2.7p.

• Debt flat over H1 at £585m. Small working capital outflow (£14m) in H1. Should reverse in H2. Still expect ‘significant debt reduction’ in H2.

• Pension deficit now only £33m. Surplus in RHM & deficit in Premier. It doesn’t impact the cash payments. Discount rate 3.3% to 3.7%.

• De-leveraging. Working capital neutral on the year as a whole. Put p12 through models & debt reduction is ‘significant’.

Gavin Darby:

• Deflation exists yet the business is in growth. Group is taking share. Strong volume growth:

• More marketing investment. Innovation up. Sales from innovation up. Will rise further. Different marketing methods. Testing day-time marketing on TV, for example.

• Themes 1) foodiness. Moving Oxo from dry stock to wet stock. Also 2) healthiness, taken 1k tonnes of salt out over last few years.

• New brand, Paul Hollywood. In market Feb 16. Home baking. Sleepy category. Will be ‘agile’.

• Sweet treats trends. Snacking, togetherness, reward.

• Sweet treats outlook. Margin 7.8% & aiming for double-digit in FY16. Capex paying off.

• Sweet treats health + nutrition. Sugar isn’t per se bad. Calorie caps. Investing in portion controls. Will deal with it as it dealt with salt.

• International sales, small base but sales +22% in H1. Australia strong, US in cake trial. Australasia sales +74% in H1. Group had 9 people dedicated to international & is now 27. Ireland sales +7.5% in constant currency.

• Delivery channels. Group beat the market with supermarkets. Sales outperforming in convenience & bargain stores. Less so in discounters as they are predominantly unbranded.

• Overall SKUs reduced. Down 43% between 2012 and 2014.

• Attracting good people as PFD becomes an exciting place to work.

• Innovation continues.

• Summary. Strategy was ambitious & is working. Q3 will be good. FY17 will see growth in sales 1% to 2%. Debt will be down ‘significantly’ in H1.

Questions & Answers:

• Debt level? Not given a forecast. Estimates are £525m to £535m. The declines in debt will then reduce as pension payments will kick in. Capital investment will also have an impact. There are still some very attractive projects out there.

• Behaviour of supermarkets? Been tough for the customers. They’ve had to adapt to 2% deflation (from 2% inflation).

• Advertising to sales? ULVR suggests 15%. PFD will spend ‘mid-teens’ more (in % terms on existing spend). High £30ms. It will continue to rise at that rate. Interesting to look at it as a % of spend of rivals – e.g. Kipling may by 90% of cake advertising – so why spend more?

• What’s your outlook re deflation? It’s stopped getting worse. Ingredients (dairy & sugar) may have turned. He thinks prices may remain flat. Opportunities to raise prices will be scarce (or absent).

• Will branded sweet treats be >1.6% growth in Q3? Won’t give sales forecast but say that treats will pick up the mantle from grocery.

• Sweet treats margin? How will you hit ‘double-digits’ for year as a whole if it was 7.8% in H1? H2 margins, including Xmas, are better anyway. Operational gearing is material. So >10% is a genuine FY margin estimate.