RBC downgrades Premier Foods to “sector perform” on valuation grounds

Investing.com -- RBC Capital Markets has downgraded Premier Foods (LON:PFD) to a "sector perform" rating from "outperform," citing that the company’s share price has now caught up with its underlying strengths and recent progress, in a note dated Tuesday. 

Shares of the British food manufacturer were down 2.6% at 04:01 ET (09:01 GMT).

The revision follows the release of Premier Foods’ full-year results and a reassessment of its financial projections.

The analysts acknowledged that Premier Foods has successfully navigated challenges over recent years and established a stable business model. 

However, they said the stock’s current trading level reflects those achievements, prompting the rating revision.

"We were a bit torn when making this decision," the analysts said. "Premier Foods has done an outstanding job resolving a number of existential problems and has evolved a reliable business model. This has taken a while, but we feel that the share price now reflects these virtues."

Premier’s shares closed at GBp 212.50, nearing RBC’s unchanged 12-month price target of GBp 220. 

The brokerage’s updated valuation is based on a discounted cash flow model, incorporating a 7.5% cost of equity and a terminal growth rate of 1.5%, resulting in an adjusted present value of GBp 2.08 per share.

RBC revised its earnings forecast slightly downward for fiscal 2026, reflecting higher finance costs following the refinancing of a low-coupon bond. 

The company now expects finance costs to rise to between £23 million and £25 million in 2026, up from £18.5 million in 2025.

Despite increasing capital expenditure guidance to £50 million in 2025, from £41 million in 2024 and £20 million in 2023, RBC estimates that Premier Foods’ net debt could fall to zero within two years, assuming no further acquisitions. 

However, the analysts noted that management does not share this assumption, hinting at the possibility of larger deals following recent acquisitions of Spice Tailor and FUEL10K.

While supportive of the company’s acquisition strategy, RBC expressed a degree of caution. 

"Yes, we think that they have earned the right to give it a go, but in our view there’s a lot to be said for a reliable, if lower growth, business model," the analysts said.

Premier Foods’ adjusted diluted earnings per share are projected to decline slightly to 13.9p in 2026 from 14.3p in 2025, before recovering in the following years. The company’s dividend per share is expected to rise to 3.36p in 2026, up from 2.80p.

RBC’s base case continues to value Premier as a well-run food producer with solid margins and a strong presence in the UK grocery market.