Associated British Foods PLC

Associated British Foods PLC (ABF) is a London-based diversified group of companies offering a wide range of products and services which are marketed through many widely known brands and enjoy a high degree of autonomy, with operations in 52 countries across Europe, Southern Africa, the Americas, Asia and Australia. The group has five reporting segments being Agriculture, Sugar, Ingredients, Retail and Grocery.

Financial Highlights (FY 2019, £m)
 
(Source: Company Filings)

Revenues were 2% higher than last year at £15.8 billionand adjusted operating profit was 1% ahead at £1,421 million, driven by strong performances from Grocery and Primark, as sales at Primark were 4.2% ahead of last year at actual exchange rates and 4.1% ahead at constant currency, while Grocery revenues were 2% ahead of last year at constant currency. Adjusted profit before tax rose by 2% to £1,406 million, while statutory profit before tax was down 8% to £1,173 million. Adjusted earnings per share increased by 2% from 134.9p to 137.5p, and earnings per ordinary share were 13% lower than last year at 111.1p due to the loss on the closure of businesses and exceptional items, while earnings attributable to equity shareholders in the current year were £878 million. Net cash inflow from operating activities rose to £1,509 million and net assets increased by £0.3 billion to £9.6 billion.

Valuation Methodology
Method:  Price/Cash Flow Approach (NTM)



Share Price Commentary
 
Daily Chart as at 05-November-19, before the market closed (Source: Thomson Reuters)

On 5th November 2019, at the time of writing the report (at 9:10 am GMT, before the market closed), ABF stock was trading at GBX 2,372, up by 5.40 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 2,659.00/GBX 2,011.00. The company’s stock beta was 0.95, reflecting marginally less volatility as compared to the benchmark index. The outstanding market capitalisation was around £17.88 billion, with a dividend yield of 2.02 per cent.

Conclusion
Driven by strong performances from Grocery and Primark, the company reported an increase in the profits from non-sugar activities, which showed the resilience of the group in a year when its ongoing sugar businesses experienced a significant drop in profits. Moreover, ABF Sugar is expected to benefit materially from the increase seen this year in EU sugar prices and from further cost reduction. Investments in the food businesses focused on capacity expansion and projects are expected to drive further operational efficiencies, along with strong profit growth in Grocery and the continued expansion of Primark.

Based on the prospects of the group, and supported by valuation done using the above method, we have given a " BUY" recommendation at the closing price of GBX 2,249 (as on 04 November 2019) with lower double digit upside potential, based on 12.10x NTM Price/Cash Flow (approx.) on FY20E Cash Flow per share (approx.).
 

Marston's PLC

Marston’s PLC (MARS) is a Wolverhampton, United Kingdom-headquartered group is the leading brewer of premium cask and bottled beers and is engaged in running pubs and beer brewing, with six breweries producing over 60 of ales at its sites in the West Midlands, Bedford, Hampshire, Cumbria, Oxfordshire and Trent. The company owns 40 inns all over the country and operates a range of traditional and contemporary breweries, and also owns and manages fashionable town centre bars, family pub restaurants and traditional locals. The operations are differentiated in three operating segments, namely Destination and Premium, Taverns and Brewing.

Trading Update
During the year ended 28 September 2019, including like-for-like sales growth of 0.8% and the contribution from pub expansion programme, total pub sales increased by 3%, and group turnover was up by 3% to £1.2 billion. As higher operating profits in Taverns and Beer businesses are expected to be offset by lower earnings in Destination and Premium, underlying profit before tax of around £101 million is anticipated, along with flat year on year reporting EBITDA.

Financial Highlights (H1 2019, in £m)
Total managed and franchised like-for-like sales were up by 2.2%, and due to positive like-for-like sales in the pub businesses, the contribution from new openings and pub acquisitions, and the strong growth in Brewing, total underlying revenue increased by 4.7% to £553.1 million with growth in all the trading segments.Total operating profit was £66 million, down from £133.4 million reported in the last year, while underlying operating profit was up by 2.4% to £76.1 million (H1 2018: £74.3 million) and group’s underlying operating margins were 0.3% behind last year. Total profit before tax decreased to £19.1 million from £54.3 million reported in the previous year due to the non-recurrence of the non-cash accounting adjustments. Underlying profit before tax was up 1.9% to £37.0 million (H1 2018: £36.3 million).Basic earnings per share were 2.6 pence per share (H1 2018: 2.0 pence loss per share) and basic underlying earnings per share were up by 2.1% on last year to 4.9 pence per share (H1 2018: 4.8 pence per share

Valuation Methodology
Method:  EV/EBITDAApproach (NTM)


Share Price Commentary

Daily Chart as at 05-November-19, before the market closed (Source: Thomson Reuters)

On 5 November 2019, at the time of writing the report (at 9:10 am GMT, before the market closed), MARS stock was trading at GBX 122.40, down by 1.56 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 131.70/GBX 89.70. The company’s stock beta was 0.21, reflecting less volatility as compared to the benchmark index. The outstanding market capitalisation was around £782.37 million, with a dividend yield of 6.10 per cent.

Conclusion
In line with plans by the group to reduce its debt in part through the disposal of certain non-core assets, the company on 04 November 2019 announced that it had reached an agreement with Admiral Taverns for the disposal of 137 pubs for £44.9 million. However, the backdrop of ongoing uncertainty around Brexit continues to be challenging, which could impact discretionary spending and consumer confidence. Moreover, the group still has a large amount of debt on its books, which is weighing upon its financials and impeding further growth.

Based on the headwinds faced by the group, we have given a "WATCH" recommendation at the closing price of GBX 122.90 (as on 4^th November 2019), while we look for any upcoming catalysts in the near term.

*The “Buy” recommendation is also valid as covered in the report as on 5^th November 2019.
*Peers of the company are Restaurant Group PLC, SSP Group PLC, J D Wetherspoon PLC, Whitbread PLC and EI Group PLC
*All forecasted figures and peers have been taken from Thomson Reuters.

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