You wont see many quicker reversals than the one from Premier Foods (LSE: PFD) this weekend.
A BBC Newsnight investigation, aired last Thursday, revealed that Premier Foods, the maker of Mr Kipling cakes, Bisto gravy and Ambrosia custard, has been requesting up-front payments from its suppliers if they wish to remain part of the supply chain, as part of a so-called pay-and-stay arrangement.
And some have been paying up according to Newsnight, Premier has received millions of pounds this way.
The news was met with a barrage of condemnation, and Premier Foods share price took a bit of a battering it closed Friday down 7% down at 33.5p, for a 56% fall over 12 months.
Change of heart
Now the firm has backtracked, with chief executiveGavin Darby saying that Over the last few days it has become apparent that this mechanism has been widely misunderstood and misinterpreted.
Well, no, Mr Darby, there was no misunderstanding or misinterpretation in a letter to a supplier seen by Newsnight you had said we will now require you to make an investment payment to support our growth, and plenty have actually paid up!
Still, he did at least say the company will now move towards a more conventional type of discount negotiation.
But all of this has served to highlight the precarious state of Premiers finances, and the share price has slipped a little further today to 32.8p as I write.
In the half-year to 30 June, Premier managed to bring in a trading profit of 48.6m from continuing operations, which was actually slightly up on the 48.5m figure a year previously.
Massive interest payments
But over the same period, the firm had to stump up 30.8m in net regular interest 20m of that being bank and bond interest. Net debt at the time stood at 572m, and thats clearly a hefty burden though at least it was down from an eye-watering 831m at the end of 2013.
And thats the core reason Premier Foods had been trying to get up-front payments from its suppliers its desperate for cash.
Theres a 50% slump in earnings per share forecast for this year, but analysts are expecting the slide to start to reverse in 2015, so could it be a good time to buy Premier shares now for a recovery? Well, theyre on a forward P/E of around 4, which is very low. But theres no dividend being paid, and the bulk of the firms trading profit is going to pay the interest on its debts and doesnt get anywhere near shareholders pockets.
Recovery on the cards?
But on the other hand Premier is in a highly geared situation, and if it can get its debts down significantly in the next couple of years, bottom-line cash for shareholders could recover very nicely.
Analysts recommendations are heavily on the Buy side right now, and we might soon be looking back on a nice recovery story here but its too risky for me.
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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
