Associated British Foods Plc - Expects a strong increase in the aggregate adjusted operating profit from the Grocery, Sugar, Ingredients and Agriculture businesses

FTSE 100-listed Associated British Foods Plc (LON: ABF) is a London-based diversified Group, which is offering a wide range of products and services.

On 3 November 2020, the Company will announce the annual results.

Rationale for Valuation – Buy at GBX 1,918.00

• On the liquidity front, the current ratio was 1.76x in H1 FY20, which was higher than the industry median (1.54x). It has also maintained a current ratio above 1.50x for the last five years and considerably above the industry median in the past three years.
• Eagle-Jone affirmed “A” Long-term credit rating in April 2020, with a stable outlook on ABF.
• From the technical standpoint, 90-day RSI stood at 49.33, which is supporting the upside movement.

Key Risks

• The Company is facing an extremely volatile trading environment, which is leading to an increased cost to operate the business.
• ABF operation was affected by COVID-19 pandemic as Primark stores were closed due to the restriction measures put in place.
• Failure to achieve the anticipated cost-saving measures could put pressure over margins.
• Change in regulation pertinent to Food Safety and Product Integrity can lead to additional costs.

Pre-Close Period Trading Update (for the 52 weeks to 12 September 2020, as on 7 September 2020)

• For FY20, the Company expects a strong increase in the adjusted operating profit for the Sugar, Grocery, Agriculture, and Ingredients businesses over last year.
• In the fourth quarter of 2020, the Company’s trading in both the food businesses and Primark were higher than the expectations.
• In the sugar division, the Company is likely to deliver a much-improved profit year-on-year.
• In August 2020, the Company had fully repaid the Revolving Credit Facility of £1.1 billion.
• At the year-end, the net cash balance will be approximately £1.3 billion (before lease liabilities).

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: EV/Sales Approach (NTM) (Illustrative)

*Peers: ASOS Plc, Boohoo Group Plc, Kingfisher Plc, and Marks and Spencer Group Plc.

Conclusion

Nearly all Primark stores are trading again, and the Company estimates that the adjusted operating profit for Primark division will be in the range £300-£350 million (excluding exceptional charges) for the financial year 2020. For the full year, ABF continues to anticipate robust growth in the aggregate adjusted operating profit of the Grocery, Sugar, Ingredients and Agriculture businesses. Moreover, the full-year effective tax rate for the Company is projected to be in the region of 30%, driven by the much lower taxable profit in Ireland and the UK this year. Overall, the Company witnessed a strong balance sheet and financial resources to meet the challenges ahead. Further, the new store openings in the United States will increase the portfolio size to eleven stores. The stock made a 52-week low and high of GBX 1,554.00 and GBX 2,730.00, respectively.

Based on the decent growth prospects, and support from the valuation as done using the above method, we have given a “Buy” stance on Associated British Foods at the current market price of GBX 1,918.00 (as on 6 October 2020, before the market close at 8:16 AM GMT+1), with lower double-digit upside potential based on 1.15x EV/NTM Sales (approx.) on FY20E sales (approx.).

WM Morrison Supermarkets Plc – Expects strong momentum in H2 FY21, with improved free cash flow

WM Morrison Supermarkets PLC (LON: MRW) is a United Kingdom-based Company, which deals in the retail supermarket stores and associated activities.

On 5 January 2021, the Company will release the Christmas trading statement.

Rationale for Valuation – Buy at GBX 168.85

• According to the Egan-Jones Commercial Paper (April 2020), the Company’s debt rating was A2, with a stable outlook.
• The debt/equity ratio recorded by the Company in the past three years was considerably below the industry median (1.16x). In H1 FY21, the debt/equity ratio was 0.68x.
• Over the past four years (H1 FY17 – H1 FY21), the Company’s revenue has been representing a compounded annual growth rate (CAGR) of 2.12%.
• The shares are offering a lucrative dividend yield of 4.00%, with a minimum 10-years track record of consistent dividend payment. In the last two years, it has also given the special interim and full-year dividend.
• From the technical standpoint, RSI-14 (30.95) is in the oversold zone and supporting the upside potential, a short-term rebound can be expected.

Key Risks

• The Company is facing an extremely volatile trading environment, which is leading to an increased cost to operate the business.
• Due to Brexit related uncertainties, consumer confidence is dented while the labour costs can potentially rise.
• Change in regulation pertinent to Food Safety and Product Integrity can lead to additional costs.
• Covid-19 pandemic also poses a risk to the supply chain and operating cost and could even interrupt the business with low demand.

Recent News

On 28 September 2020, the Company launched an SOS ‘Serve our Students’ food delivery service for students (who are self-isolating).

Financial Highlights (for the half-year to 2 August 2020 (H1 FY21), as on 10 September 2020)

(Source: Company Website)

• Morrisons witnessed a strong balance sheet, with low debt, total RCF (Revolving Credit Facilities) of £1.75 billion and a solid debt maturity profile.
• Despite the low demand, total revenue was merely down by 1.1% year-on-year in H1 FY21.
• At the end of H1 FY21, Net debt widened to £2,802 million from £2,458m (the level at the end of FY20); EBITDA/net interest ratio was 5.5x.
• The interim dividend improved to 5.7% to 2.04 pence (FY20: 1.93 pence) through the decision on special dividend remained deferred.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: EV/Sales Approach (NTM) (Illustrative)

Conclusion

Overall, the Company tends to face short-term disruption in sales and profitability. However, the Company has strong liquidity and cash flow to manage the ongoing uncertainties. Moreover, the sales are improving with lockdown easing while online sales continue to grow. The interim dividend per share of 2.04 pence reflected strong first-half trading performance and confident outlook. Further, the Company has started supplying the remaining 240 McColl's stores in the H2 FY21 and progressing well with improved cash flow to deliver another year of profit growth. Morrison is also focusing the resources to build a stronger, broader, and more accessible business so that it can tap the upcoming future opportunities. The stock made a 52-week low and high of GBX 157.55 and GBX 210.00, respectively.

Based on the decent growth prospects, and support from the valuation as done using the above method, we have given a “Buy” stance on WM Morrison Supermarkets at the current market price of GBX 168.85 (as on 6 October 2020, before the market close at 9:58 AM GMT+1), with lower double-digit upside potential based on 0.40x EV/NTM Sales (approx.) on FY21E sales (approx.). 

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

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