Associated British Foods PLC – Operating with Strong Balance Sheet and Improved Cash Flow

Associated British Foods Plc (LON: ABF) is a London-based diversified group, which is offering a wide range of products and services.

On 2^nd July 2020, the Company will release its trading update.

Financial Highlights (for the 24 weeks ended 29^th February 2020)

(Source: Interim Results, Company Website)

Overall results reflected good trading performance in the first half of 2020, with a strong balance sheet and improved cash flow.For the first half of 2020, revenue of the group of GBP 7.6 billion was 3 per cent ahead at constant currency and 2 per cent ahead of last year at actual exchange rates. Adjusted profit before tax for H1 FY2020 increased by 1 per cent at actual exchange rates to GBP 636 million as compared with the corresponding period of the last year. Adjusted earnings per share rose by one per cent at actual currency rates. Led by higher adjusted operating profit and lower capital expenditure in the food businesses following the completion of several major projects last year, the net cash flow increased as compared with the corresponding period of the last year. Moreover, the management has decided not to declare an interim dividend.

Share Price Performance

1-Year Chart as at May-29-2020, after the market closed (Source: Refinitiv, Thomson Reuters)

On 29th May 2020, Associated British Foods Plc’s shares closed at GBX 1,821 and were down by 2.93 per cent versus the previous day closing price. Stock 52 weeks High and Low are GBX 2,730.00/GBX 1,554.00.

From the technical standpoint, its shares were trading well above its short-term support level of 20-day simple moving average prices, which reflects an uptrend in the stock and carrying the potential to move up further.

Valuation Methodology


Valuation Metrics

(Source: LSE)

As on 30th April 2020, the Price/Earnings, EV/EBITDA and Price/Book multiples of the ABF Group were 17.1x, 7.3x and 1.6xx, respectively, and stood lower as compared with the Food Producers industry, reflecting that the company is trading at a lower multiple as compared to its peers. It also reflects, shares are undervalued against its peers.

Growth Catalysts
The Twinings revenues were ahead of last year; AB World Foods achieved decent sales growth and AB Mauri has delivered operating profit and sales growth. Grocery division has attained excellent profit and margin growth; Primark profit was ahead of the anticipations, and Sugar division is on track to deliver a material improvement in profit for the full year.

Conclusion
The Company has delivered encouraging first-half trading, with food businesses continuing to perform exceptionally well. Rapid actions taken on Primark and expectation for a gradual restoration of sales, and strong cash position at half year-end. The Group also has a strong balance sheet and financial resources to meet the challenges ahead. In the medium to long term outlook, the company maintains its positive view for the shareholders. In the Sugar, Grocery, Ingredients and Agriculture businesses, the expectation for the aggregate operating results is unchanged in the second half of 2020. AB foods had cancelled its dividend, but the Group has ample cash to deal with COVID-19 challenges. Further, the Company has consistently delivered a ROE of above 10% over the past years. Among the Food Producers businesses listed on the LSE, ABF shares are the decent outperformer amid COVID-19 pandemic. ABF’s shares have surged about 8.43% on a WTD basis and relatively outperformed the benchmark index.

Based on the decent prospects, which are supported by valuation done using the above method, we have given a “Buy” recommendation at the closing price of GBX 1,821 (as on 29th May 2020), with lower double-digit upside potential based 26.98x NTM Price/Earnings (approx.) on FY20E earnings per share (approx.).

Imperial Brands PLC – Operating with Tobacco Gross Profit Up, Strong Cash Position, and Business Well Capitalised

Imperial Brands PLC (LON: IMB) is a FTSE 100 listed fast-moving consumer business, with operational interest in a variety of fine cut and smokeless tobaccos, cigarettes, papers and cigars.

The Company will release its full-year results on 17^th November 2020.

Growth Trajectory Holds Upside Potential
The Group showed progressive dividend growth from the FY20 rebased level, reflecting underlying business performance. IMB delivered a share growth in tobacco.

Financial Highlights (for the six months ended 31st March 2020)

(Source: Presentation, Company Website)

Overall results were decent, with an improved share performance, stronger in-market execution, progress towards stronger business, and robust cash position. Tobacco net revenue stood at GBP 3,509 million in H1 FY20, which remained nearly flat against the corresponding period of the last year. The adjusted operating profit for the financial year 2020 reduced by 9.3 per cent (down 7.7% at constant currency) to GBP 1,469 million as compared with the same period of the last year (H1 FY19: £1,620 million). The Group witnessed a growth of 1.3 per cent in Tobacco gross profit.

Share Price Performance

1-Year Chart as at May-29-2020, after the market close (Source: Refinitiv, Thomson Reuters)

On 29th May 2020, Imperial Brands PLC’s shares closed at GBX 1,466.50 and were down by 2.53 per cent versus the previous day closing price. Stock 52 weeks High and Low are GBX 2,256.00/GBX 1,258.20.

Valuation Methodology 


Valuation Metrics

(Source: LSE)

As on 30th April 2020, the EV to EBITDA multiple of the Imperial Brands PLC was 8.3x and the same multiple was lower as compared with the Tobacco industry. It is reflecting that the Company is trading at a lower multiple as compared to its peers.

Conclusion
The Company abridged its dividend and said cutting debt was its main priority as tobacco sales were flat and vaping revenues have reduced in the past half-year amid elevated global volatility created by COVID-19. The Board believes that the arrival of new Chief Executive (Stefan Bomhard) will add great value to the Group’s performance and also increase the share price. The Group witnessed a strengthening in the balance sheet, with the rebased dividend to accelerate debt reduction; focus on cost & cash; renewed RCF (Revolving Credit Facility) & further committed facilities. During the H1 FY2020, there was a small impact on trading from COVID-19, but the Group expects this to be more pronounced in the second half of 2020, driven by changes in the consumption patterns and continued pressures on the duty-free & travel retail business. The new revolving credit facility will help the Company to operate effectively in the uncertain market environment. The company’s prospects look good, and it could be an attractive opportunity to invest in the long term.

Based on the decent growth prospects and the valuation done using the above method, we have given a “Buy” recommendation at the closing market price of GBX 1,466.50 (as on 29th May 2020) with lower double-digit upside potential based on 3x NTM EV/Sales (approx.) on FY20E Sales (approx.).
 
*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.
* The “Buy” recommendation is valid for the current price as covered in the report as on 1^st June 2020.

Disclaimer

PLEASE BE ADVISED THAT YOUR CONTINUED USE OF THIS SITE OR THE INFORMATION PROVIDED HEREIN SHALL INDICATE YOUR CONSENT AND AGREEMENT TO THESE TERMS.
References to ‘Kalkine’, ‘we’, ‘our’ and ‘us’ refer to Kalkine Limited.
This website is a service of Kalkine Limited. Kalkine Limited is a private limited company, incorporated in England and Wales with registration number 07903332.
The article has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. Kalkine is not responsible for material posted on this website and does not guarantee the content, accuracy, or use of the content in this site. No advice or information, whether oral or written, obtained by you from Kalkine or through or from the service shall create any warranty not expressly stated.
Kalkine do not offer financial advice based upon your personal financial situation or goals, and we shall NOT be held liable for any investment or trading losses you may incur by using the opinions expressed in our publications, market updates, news alerts and corporate profiles. Kalkine does not in any way endorse or recommend individuals, products or services that may be discussed on this site. You should discuss your portfolios and the risk tolerance level appropriate for your personal financial situation, with a professional licensed financial planner and adviser.