Investors’ Chronicle: Premier Foods, Crest Nicholson, JD Wetherspoon

BUY: Premier Foods (PFD)

The company will cut more prices in the fourth quarter after its total market share gains rose by more than 1.2 per cent, writes Christopher Akers.

Premier Foods reported its “biggest ever Christmas” as the Mr Kipling maker posted double-digit growth across divisions and made significant market share gains in its third quarter to December 30.

Total revenue was up 14.4 per cent to £353mn as shoppers snapped up festive items such as gravy and mince pies. Lower promotional prices in the period “positively impacted performance”, according to chief executive Alex Whitehouse, and prices will be cut on products including Loyd Grossman cooking sauces and Mr Kipling bakewell slices in the fourth quarter. 

Grocery revenue rose by 11.9 per cent, as seasoning items such as Bisto gravy and Oxo stock pots enjoyed a Christmas boon. Encouragingly, share gains came in at over 110 basis points and revenue from new categories almost doubled. 

Growth was stronger at the much smaller sweet treats division. Revenue climbed 21.3 per cent, driven by a Cadbury cake sales uplift after unscheduled maintenance of a plant line last year. The division gained over 120 basis points of share as 4mn more mince pies were sold than last time around.

The company continues to make progress in international markets, from Ireland to the US, with further overseas penetration a key part of management’s strategy. International sales were up 11 per cent in the period on a constant currency basis as distribution gains aided Sharwood’s cooking sauces and The Spice Tailor meal kits. In North America, Mr Kipling cakes are now listed in almost 3,000 stores. 

Management maintained its full-year profit guidance, which it upgraded in November when it guided for trading profits to be around 10 per cent higher than the £158mn posted in the previous year. A valuation of 10 times forward consensus earnings, while above the five-year average of eight times, isn’t overly demanding.

SELL: Crest Nicholson (CRST)

The FTSE 350 housebuilder looked to its competition for a new boss. It should look to them for strategy too, writes Mitchell Labiak.

It makes sense for companies to dovetail announcements. Still, housebuilder Crest Nicholson’s timing was hardly ideal, revealing it had poached its rival Persimmon’s chief commercial officer to replace its retiring chief executive on the same morning it posted a slump in sales and profits in its results for the year to October 31.

Outgoing boss Peter Truscott, who will step down “later in the year” and hand the reins over to Persimmon’s chief commercial officer Martyn Clark, no doubt would have wanted to share better news in what will probably be his final set of results at the company.

As it was, reduced buyer demand from higher interest rates drove pre-tax profit down 29.6 per cent while revenue sank 28 per cent. Adjust for the fact the company paid out a higher cladding bill in the previous reporting period than this one, and pre-tax profit cratered 70 per cent.

The market reaction to this was a shoulder shrug, likely because the company warned investors about the miserable trading conditions in a trading update early this month, after which shares tumbled 6 per cent.

The combination of fire safety costs and lower interest rates has hit all housebuilders, but Crest is faring worse than its peers. Clark’s soon-to-be-former-employer Persimmon expects 2023’s full-year results to be ahead of guidance, and Taylor Wimpey expects its results to be at the top end of forecasts. 

All three have adopted the same hunkering down strategy during this downturn, cutting production while raising prices, but the move has not paid off for Crest, suggesting it is not as well run. While a new man in charge could change this, that is far from a guarantee, especially when Crest has less net cash to play with than last year for reinvesting into the business. 

It does have close to 34,000 homes in its land bank, which should last it well over a decade at its current pace of delivery. However, investors might question why Crest has been unable or unwilling to deliver homes as fast as some of its rivals with such a vast supply of potential homes in reserve. The implication could be that demand for its offering is not as strong.

The dividend yield does make this stock enticing, even with the flattening of shareholder payouts this year. But what makes us circumspect is the high price-to-earnings ratio. Other, better-performing housebuilders are available for a lower multiple.

HOLD: JD Wetherspoon (JDW)

Sales growth rates have outperformed the market for almost a year and a half, writes Christopher Akers.

JD Wetherspoon’s sales growth outstripped the market yet again as the pub operator enjoyed a strong Christmas, but chair Tim Martin struck his usual negative tone on the tax discrepancies between pubs and supermarkets and warned about ongoing cost pressures.

The company revealed in a trading update ahead of its interim results, due to be released in March, that like-for-like sales rose 15.2 per cent in December, an outperformance of the market for the 16th consecutive month.

Wetherspoon sales were up 10.1 per cent in the 25 weeks to January 21 against last year, improving to 11.1 per cent in the second half of the period, with bar sales growing at the fastest pace. Food sales rose by 7.9 per cent.

Trading compared favourably with listed peers that have updated the market recently. Marston’s sales climbed 8.1 per cent in the 16 weeks to January 20, while premium operator Young & Co’s Brewery said managed sales rose 4.7 per cent in the 13 weeks to January 1. Numbers are clearly moving in the right direction.

The update guided for annual interest costs (excluding leases) and net debt levels to be in line with positions at the end of the last financial year, at around £51mn and £642mn, respectively.

Martin complained that pubs are significantly worse off than supermarkets (where the price of a drink is much lower) when it comes to VAT and business rates treatment, and noted that “labour and energy costs are far higher than pre-pandemic” for the hospitality sector. 

Despite this, management expects full-year trading to be in line with market expectations. Analysts, according to FactSet, forecast annual sales of £2.03bn and a pre-tax profit before separately disclosed items of £68mn. 

While sales growth impressed, the rating isn’t the cheapest. Wetherspoon shares currently change hands at 19 times forward consensus earnings, so investors may cast around for better value options elsewhere in the sector, although the rating still represents a sizeable discount to the five-year average of 29 times.

Investors must also consider that the company has been a net disposer of pubs in the year to date. Two sites have been opened, five sold, and eight leasehold properties have been surrendered or sublet.