Associated British Foods PLC

Associated British Foods PLC (LON: ABF) is a FTSE 100 listed Company, which is engaged in the food processing and retailing business. Under the license since 2016, ABF has been growing cannabis post phasing out its Norfolk-based tomato growing facility.

Key Dates

ABF confirmed to pay the interim dividend per share of 6.2 pence on 9 July 2021 to the shareholders on the register by the close of 4 June 2021.

Investment Rationale – BUY at GBX 2,209.00

• Higher cash generation of food business also offset the cash outflow pertaining to Primark’s stores.
• The reopening of Primark stores with lockdown easing and confirmation of interim dividend underpins the management confidence in the business outlook.
• From a technical standpoint, stock price is trading close to the lower standard deviation, while the 14-day RSI (40.17) gives an oversold signal.  
• All major metrics (EV/Sales, EV/EBITDA, Price/Book, and Price/Cash Flow) of ABF reflect an undervalued position against the Food & Tobacco industry.

Key Risks

• Due to the trading restrictions placed on Primark, there was a significant loss of retail sales, and therefore, revenue plunged 17% during H1 FY21 on actual exchange rates (AER).
• Delay in the UK’s lockdown easing plan with mounting Delta variant cases of the Covid-19 can worsen the cash burn on Primark stores closure.
• Fluctuations in the raw materials price and availability of operating inputs could impact the profitability of ABF.

Trading Update for the 40 weeks to 19 June 2021 (as on 1 July 2021)

(Source: Company Website)

• As shown in the above image, revenue surged in Q3 FY21 (16-week period from 28 February to 19 June 2021) across all segments except Retail.
• The Primark revenue also reached £1.6 billion in Q3 FY21 with the reopening of all stores.
• The cash generation in the quarter was ahead of the prior year and expectations.
• At the end of FY21, Net cash before lease liabilities is likely to be over £1.7 billion.

Share Price Chart

(Data Source: Refinitiv, Analysis by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY21) (Illustrative) 

Conclusion

Higher prices in Europe and Africa and strong volumes in Illovo and China boosted the sugar revenue in Q3 FY21. The reopening of stores with lockdown easing has supported Primark revenues. ABF has already given an exceptional performance through its food processing business (including sugar, grocery, agriculture, and ingredients) in FY21 thus far. Therefore, the outlook for the operating profit is now in line with the last year. Moreover, Q4 FY21 revenues are likely to increase by favourable sales volumes. The stock made a 52-week high and low of GBX 2,528.00 and GBX 1,618.00, respectively. On the technical chart, the next important support level is at GBX 1,811.38.

Based on the strong food business, lockdown easing, consistent dividend policy, and favourable valuation conducted above, we have given a “BUY” recommendation on Associated British Foods PLC at the current price of GBX 2,209.00 (as on 8 July 2021, 7:20 AM GMT), with lower double-digit upside potential based on 37.17x Price/NTM Earnings (approx.) on FY21E Earnings Per Share (approx.).

Centrica PLC

Centrica PLC (LON: CNA) is a FTSE 250 listed global energy solutions and services provider, which concentrates on satisfying the client’s changing needs and enabling the changeover to a lower-carbon future.

On 22 July 2021, CNA is due to release its H1 FY21 results.

Investment Rationale – Buy at GBX 51.88

• By the end of FY21, Bord Gáis Energy's Whitegate power station is likely to return to service.
• Centrica is progressing well with business restructuring and plans to further focus on its UK and Ireland business.
• Following the sale of Direct Energy, Centrica has significantly reduced its net debt (including margin cash) to £0.5 billion at the end of Q1 FY21, from £3.0 billion at the start of FY21.
• From a technical standpoint, Bollinger Bands suggests that the price is hovering close to the lower standard deviation, while the 14-day RSI (45.42) is also near the oversold position.
• In terms of valuation metrics, EV/Sales, EV/EBITDA, Price/Earnings, and Price/Cash Flow multiples are relatively undervalued against the industry median.

Risk Assessments

• Given the prevailing uncertainties, Centrica abstained from providing any earnings or cash flow guidance for FY21.
• The electricity demand slump from the UK business customers and subdued residential boiler installations can affect profitability.
• Risks related to the environment and climate change could hamper the operations of the Company.

Recent News

Disposal: On 1 June 2021, Centrica announced the sale of its Peterborough site to Whitetower Holdings UK Limited for a consideration of £20 million (subject to other completion adjustments). The transaction is expected to complete by September 2021.

Trading Statement (as on 10 May 2021)

• Centrica continued to maintain a tight focus on cash position as the external environment remained uncertain.
• For FY21, the Group expects to deliver operating cost savings of over £100 million year-on-year since the restructuring steps remained on track.
• During Q1 FY21, electricity demand was nearly 15% down from its UK business customers while the residential boiler installations fell 11% against Q1 FY20.

Share Price Chart

 (Data Source: REFINITIV, Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY21) (Illustrative) 

Conclusion

The disposal of the Peterborough site is consistent with CNA’s strategy to build a leaner and simpler business, as it targets to be net-zero by 2045. Moreover, the reduced net debt and planned operating cost savings shall put them in a good position to deliver greater value for its shareholders. In a nutshell, Centrica is moving in the right direction for the long run; however, short-term uncertainties can impact its profitability and negatively affect the share price. The stock made a 52-week High and Low of GBX 59.32 and GBX 35.69, respectively. On the technical chart, the next important support level is at GBX 40.47.

Based on the progress on restructuring plans, expected cost savings, reduced net debt with supported by the valuation conducted above, we have given a “BUY” recommendation on Centrica PLC at the current market price of GBX 51.88 (as on 8 July 2021, at 7:25 AM GMT), with lower double-digit upside potential based on 16.84x Price/NTM Earnings (approx.) on FY21E Earnings Per Share (approx.).  

*All forecasted figures and Peer information have been taken from REFINITIV.

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

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

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level (indicative stop-loss price).

Disclaimer

References to ‘Kalkine’, ‘we’, ‘our’ and ‘us’ refer to Kalkine Limited.

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