Premier Group - Taking another shot at listing
| Name |
Premier Group |
| Ticker |
PMR |
| Type |
IPO - secondary sell down plus R100 million greenshoe |
| Offer size |
R3.6 billion |
| Offer Price |
R53.82 |
| Opening Date of IPO |
Friday, 10 March 2023 |
| Application deadline |
Thursday, 16 March 2023, 16:00 |
| Closing Date of IPO |
Friday, 17 March 2023, 12:00 |
| Listing on the JSE |
Friday, 24 March 2023 |
| Minimum subscription amount |
R1&bsp;000 and in increments of R1&bsp;000 thereafter |
Company Description
Premier is the largest baker in South Africa and houses several other brands within the sweets, confectionary, general staples, and feminine hygiene space. The main brands in the Premier stable are Blue Ribbon, Iwisa, Manhattan Sweets, Rascals, Super C's, and Lillets.
Premier's biggest market is South Africa (~84% of sales) but it also has exposure to certain neighbouring countries and the United Kingdom (UK). Milling & Baking (Millbake) makes up the bulk of revenue (~82% of sales). Premier has a market share of ~24% in bread in South Africa.
Background to the listing
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The new IPO follows an abandoned bid in November/December last year. The offer price is at the lower end of the range provided at that time and is in-line with our fair value for the company's stock.
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The initial public offering will be a R3.5 billion secondary sell-down by Brait (BAT) and a R100 million greenshoe offer. BAT will use the proceeds to address its liquidity requirements.
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Titan Premier Investments will take a cornerstone investment in the IPO representing c.36.2% of the maximum number of offer shares (including the greenshoe). Pre-launch commitments have been sourced from other institutions for approximately R1.34 billion, translating to ~75.5% coverage of the offer.
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The balance of the IPO offer (R832 million) is underwritten by Titan.
Premier holds meaningful market share in most categories of operation
As at 31 August 2022, Premier had an approximate 24% market share in bread, 32% market share in flour, 20% market share in maize, 18% market share in total sugar-based confectionery, and an 18% market share in feminine care in South Africa (DataOrbis). Premier holds the market leading position in bread in the Western Cape, and the second largest in KwaZulu-Natal and the Eastern Cape.
Its key competitors in milling and baking are Tiger Brands and Pioneer Foods.
Household spending on non-durable items is resilient
The food market in South Africa continued to grow over the last three years despite the impact of Covid-19. This trend is expected to persist, and we expect non-durable household expenditure to increase 3.3% in 2022, 1.5% in 2023 and 1.4% in 2024 in real terms.
Bread as a category is defensive
Premier has a market share of ~24% in bread in South Africa. This is an essential food item and therefore more defensive during times of economic strain.
Inflation pass-through was successfully managed during the last "high-inflation" cycles. Margins were relatively unscathed. This was due to pro-active pricing and the essential nature of the product (you cannot really "trade down" from bread).
Premier's strategy
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Premier has invested ~R5 billion in its Millbake business to improve its national reach in South Africa - particularly in the inland region. The company is specifically aiming to increase market share in bread.
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The company has upgraded most of its bakeries over the past ten years to incorporate the latest technology and add scale. This allows it to bake more efficiently, bake "tastier" bread, and to be the lowest cost large-scale bread producer in the country.
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The group is expected to continue making bolt-on acquisitions in groceries.
Financials
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Over the last three financial years, Premier has grown its revenue and adjusted EBITDA at compound annual growth rates of 15% and 20%, respectively.
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In FY22:
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Millbake revenue grew 12.5% to R11.9 billion on volume growth of 6.0% and average price inflation of 6.5%. Adjusted
EBITDA, excluding head office costs, grew 32% to R1.4 billion, with the margin expanding by 170bps to 11.7%.
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Groceries and International increased revenue by 35%. Adjusted EBITDA, excluding head office costs, increased 24% to R200 million, as Mister Sweet contributed substantially after being acquired earlier in the financial year.
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For 1H23, revenue grew 23.9% y/y. EBITDA and EBIT grew by 15.7% and 23.0% respectively, while finance costs declined 72.9% mainly due to the shareholder funding provided by Brait being "equitized" in May 2022.
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Millbake grew revenue by 24.7% to R7.2 billion on 4.5% volume growth and a 20.2% price impact (passing through higher commodity costs. EBITDA increased 15.3% to R761 million with the EBITDA margin contracting by 90bps to 10.6%.
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Groceries and International increased by 19.8% to R1.5 billion with a sustained strong performance in Sugar and Confectionary. EBITDA increased by 25.1% to R112 million and the margin expanded by 30bps to 7.5%.
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The leverage ratio stood at 1.4 times EBITDA at period end, increasing to about 2 times thereafter.
Dividend
Premier is targeting a pay-out ratio of 30% to 60% of diluted headline earnings per share from continuing operations considering its targeted gearing of 1.5 times EBITDA by FY25, as well as its cash generation and growth aspirations.
The intention is currently to declare a maiden dividend in FY23.
What we like about this company
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Bread and maize are very defensive essential foods categories. There is also still scope to expand the market for bread in SA, particularly if we begin seeing "go forward" in real GDP per capita growth. As an aside, real household disposable income has grown in South Africa over the last 10 years despite tepid economic growth.
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The formal bread market is tightly controlled by the largest three bakers, of which Premier is one (Tiger Brands and Pioneer Foods are the others). The barriers to entry at scale are high because of tooling costs and distribution complexity.
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The investment in the new Pretoria bakery will help with improved efficiency and quality going forward. This in turn could be supportive of margins in the baking business and the business in its entirety. The Pretoria upgrade is one of many undergone over the past few years - most of Premier's bakeries are state-of-the art and thus more efficient.
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There is an opportunity to improve margins in the rest of the business (ex-Bread) as it continues to integrate Mister Sweet (acquired last year June) and improve in other areas.
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Vertical integration. Premier owns most of its distribution and warehousing capability which gives it a cost advantage.
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There is structural support in the feminine hygiene market both in SA and the rest of Africa, Premier is the number three player in this space locally.
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Experienced management team.
What we don't like about this company
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Free float will likely be quite low at the start, especially since Brait will remain invested and Titan has taken up a fair chunk of the shares being sold by Brait.
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Commodity-based input cost is inherently volatile. This can impact margins or lead to high-cost throughput, which may impact demand and columns. Premier is particularly exposed because baking makes up such a big part of its business.
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Risk of making a poor acquisition exists.
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While more defensive than other consumer exposure areas of the market, a weak economic backdrop and pressure on discretionary spend will still have an impact here.
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Regulatory interference in pricing is a possibility in essential foods categories.
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Cost inflation outside of commodity prices is also very high and may threaten its ability to increase prices without compromising volume.
Valuation & SPM View
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We utilised a variety of valuation techniques and settled on an average valuation of R53.48 - on par with the offer price.
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We think that Premier Group will trade on multiples in-line with the other mid-cap food producers.
How to apply
FNB Stockbroking and Portfolio Management (SPM) - Log onto shares.fnb.co.za. Please indicate the number of shares/rand amount you would like to invest.
FNB Share Investing (SI) and Shares Zero - Send an email to shareinvesting@fnb.co.za. Please indicate your account number and rand amount you would like to invest.
Please ensure funds are available. If your account is not funded the application will be cancelled.
Take note that allocations are not guaranteed, and fractional shares will not be issued.
