We started coverage of Associated British Foods (ABF) with a Buy recommendation and a price target of 2470p.
About ABF
ABF is a diversified Food and Retail business with market-leading positions in the businesses/countries in which it operates. The Group is a diversified international food, ingredients, and retail group, with sales of £15.4 billion and operations in 50 countries across Europe, southern Africa, the Americas, Asia, and Australia.
Business is split into five segments:
* Grocery: manufacturing and selling of grocery products; Twinings and Ovaltine being the global hot beverage brands.
* Sugar: growing, processing, and selling sugar beet and cane to industrial users.
* Agriculture: manufacturing and selling of animal feeds, among other products.
* Ingredients: manufacturing of yeast and other bakery ingredients.
* Retail: buying and merchandising clothing and accessories through the Primark and Penneys retail chains.
Investment Rationale
ABF shares have fallen roughly 18 per cent this year, compared with a 2 per cent decline in the FTSE 100 index. We see the weakness in the share price as a buying opportunity. The weakness was brought mainly by its;
* Weakness in Primark sales due to a long hot summer (which is a one off) as well as;
* Weakness at its sugar business, which is suffering from lower prices brought on by global oversupply and the end of EU production and export restrictions for European producers. Though the sugar business only accounts from 14% of revenues.
Never-the-less, Management confirmed that profits from Primark and ABF’s grocery, agriculture and ingredients businesses are expected to “more than offset” falling EU sugar prices.
This allowed it to confirm its annual guidance for improved operating profit and earnings per share. Margins at Primark also recovered after shrinking in the first half of the year. Operating margins for the full year would be approximately 11 per cent compared to 10.4 per cent last year.
We like ABF particularly because of its value retail business, Primark (c60% of group operating profits). Primark offers a unique combination of lowest pricing in the market and keeps up with fashion trends. We believe the chain has further room to grow in both the markets it operates in as well as new markets, continuing to contribute positively towards the group.
ABF’s year end is September and will report results for the full year on 6th November 2018.
Risks
Predicting what will happen to Primark’s margins in 2019 is complicated by uncertainty about Brexit and its effect on currency values.
Operating margins at Primark next year will be stable at 11 per cent, if the group can secure its spring/summer merchandise at current exchange rates. Whether it can do so will depend largely on Brexit negotiations and their impact on sterling.
Valuation
Our 12-month price target of 2470p factors in a discount rate of 10% and a forward Price-to-earnings ratio of 20x.
We like ABF particularly because of its value retail business, Primark (c60% the group’s operating profits). Primark offers a unique combination of lowest pricing in the market and keeps up with fashion trends. We believe the chain has further room to grow in both the markets it operates in as well as new markets.
This article was issued by Kristian Camenzuli, investment manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.