1. UK Food & Beverages Industry Landscape

The Food and Beverages industry encompasses a list of companies that deals with processing raw food materials, packaging, & distribution. The UK Food industry employs nearly 4 million people, and it is the largest sector in the country. The resilient performance of the industry has been overcoming the economic consequences of Brexit. The UK food and drinks industry exports nearly £22.5 billion in trade, and it has the biggest manufacturing industry, which is even larger than the aerospace and automotive industry combined. The Beverage industry is commonly distinguished between non-alcoholic and alcoholic drinks. The industry is relatively mature, which comprises major companies and a few smaller players.

According to the recently available data from the food & drink federation, the UK food and drink revenue from non-EU countries had shown a modest jump of around 13% during the first half of 2021, representing almost 46.6% (£4.3 billion) of all UK food and drink exports, with higher contributions from China, Singapore, Australia, Japan, and the Gulf region. Moreover, the growth indicated that non-EU exports are now almost back to pre-Covid levels.

Key Trends in the Food & Beverages Sector

Risk Exposures to the Food & Beverages Sector 

• UK GDP: The UK economy witnessed a slowdown as the GDP grew quarter-on-quarter by around 1.3% during Q3 FY21, which remained lower-than-expected growth of around 1.50%.
• Rise in Interest Rates: New Zealand came up with a second interest rate hike in the last two months. Moreover, rising inflation worldwide had put pressure on several Central Banks as they struggled to curb it.
• Covid-19 Pandemic: The Omicron variant of the Covid-19 pandemic may adversely impact the top-line business of the Company.
• Change in Consumer Taste: As consumers are getting more aware and health-conscious, their expectations have changed. On the other hand, pandemic witnessed panic buying, which calls for maintaining an appropriate level of inventory.

SWOT Analysis

Benchmark Index Performance

Based on the one-year performance, the FTSE All-Share Beverages index has outperformed the FTSE 100 and the FTSE 250 index. The FTSE All-Share Beverages index generated a return of about 35.92%; however, the FTSE 100 produced a return of around 12.66%, and FTSE 250 generated a return of around 16.46%

Figure 1: One Year Benchmark Index Performance

(Source: Refinitiv; Analysis done by Kalkine Group)

Food & Beverages Sector Outlook

With reference to the data from the leading industry expert, the total revenue of the UK Food & Grocery sector is expected to reach £211 billion by 2022. The Covid-19 pandemic had brought a transition from offline shopping to online, while the loyalty of customers increased. This can have a long-term impact on the distribution network, sourcing strategies, and commodity pricing. For the Alcoholic Beverage market, the volumes had witnessed a massive decline since cafes, pubs and restaurants remained temporarily closed during the Covid-19 led lockdown. Nonetheless, a gradual recovery had already begun. On the other hand, the soft drinks market is projected to post stable growth until 2024, and companies continue to switch from sugary carbonates to drinks with natural flavors with healthier content.

2. Investment analysis and stocks under discussion (ABF, TATE, WYN)

After gaining insights into the Food & Beverages sector, we would look at the business model of three Food & Beverages players listed on the London Stock Exchange. 

A. Associated British Foods PLC (LON: ABF)

(Recommendation: Buy, Potential Upside: 10.93%, Market Capitalization: GBP 15.24 billion)

Associated British Foods PLC (LON: ABF) is an FTSE 100 index listed Company, which is engaged in the food processing and retailing business.

ABF will pay a final dividend of 20.5 pence per share and a special dividend of 13.8 pence per share, totalling around 34.3 pence per share on 14 January 2022, while the ex-dividend date will be 16 December 2021.

One Year Share Price Chart

 (Data Source: Refinitiv, Analysis by Kalkine Group)    

From a technical standpoint, the stock is hovering between the lower Bollinger band and the middle Bollinger band, indicating an upside potential in the stock price.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 10.93% over the closing price of GBX 1,923.00 (as of 30 November 2021).

B. Tate & Lyle PLC (LON: TATE)

(Recommendation: Buy, Potential Upside: 19.10%, Market Capitalization: GBP 2.95 billion)

Tate & Lyle PLC (LON: TATE) is an FTSE 250 index listed Company, which is the global provider of food and beverage ingredients and solutions.

TATE will pay an interim dividend of 9 pence per share on 05 January 2022 with an ex-dividend date of 25 November 2021.

One Year Share Price Chart

(Source: Refinitiv; Analysis done by Kalkine Group)

From a technical standpoint, the stock price is trading around the lower Bollinger band, indicating an upside potential in the stock price. Moreover, the 14-days RSI of ~26.77 indicates oversold territory.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 19.10% over the closing price of GBX 629.40 (as on 30 November 2021).

C. Wynnstay Group PLC (LON: WYN)

(Recommendation: Expensive, Potential Downside: 19.85%, Market Capitalization: GBP 111.64 million)

Wynnstay Group PLC is an FTSE AIM All-Share index listed Company that manufactures and supplies agricultural products to farmers and the wider rural community in Wales.

WYN had paid an interim dividend of 5 pence per share on 29 October 2021 with an ex-dividend date of 30 September 2021.

One Year Share Price Chart

(Data Source: Refinitiv, Analysis by Kalkine Group)

From a technical standpoint, the momentum indicator 14-day RSI (~68.10) is inching towards an overbought zone and suggesting a correction in the stock price.

Valuation Methodology

Our illustrative valuation model suggests that the stock has a downside potential of 19.85% over the closing price of GBX 550.00 (as on 30 November 2021).

*All forecasted data and peer information have been taken from REFINITIV.

*The reference data in this report has been partly sourced from REFINITIV.

*The "Buy” recommendation is also valid for the current price as covered in the report as on 01 December 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

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