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.

Key Dates

• ABF expects to publish its pre-close trading update on 13 September 2021.
• 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 2,052.00

• Higher prices of Sugar in Europe and Africa, and strong volumes in Illovo and China boosted the Sugar revenues in Q3 FY21. The global sugar demand shall continue to surpass the production in FY22 as well, which shall further generate pricing opportunities.
• The relentless rise in input prices has put pressure on the Company’s operating expenses; however, it has also eased pressure on the Federal Reserve to begin tapering its asset purchases.
• As jobless claims in the US are failing, it is strengthening hopes for a pickup in economic activity.
• From a technical standpoint, the stock price is trading below the 20-day EMA (GBX 2,067.00), showing a bearish price momentum.
• All major metrics (Price/Earnings, EV/Sales, EV/EBITDA, Price/Book, and Price/Cash Flow) of ABF reflect an undervalued position against the median of the Consumer Non-Cyclicals sector.

Key Risks

• The economic recovery is derailed with the spread of new variants of Covid-19. Moreover, food producers can face labor shortages with mounting Delta variant cases of the Covid-19.
• Fluctuations in the raw materials price and availability of operating inputs could impact the profitability of ABF.
• 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).

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.
• 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

Associated British Foods recorded revenue growth across all business segments (except Retail) for the 40 weeks to 19 June 2021. The reopening of Primark stores with lockdown easing and confirmation of interim dividend underpins the management confidence in the business outlook. Moreover, the cash generation in the last quarter was ahead of the management guidance and was stronger than in prior years. With a promising environment for sugar prices, cash generation should be boosted further. The outlook for adjusted operating profit for the Group is now in line with the last year. The stock made a 52-week high and low of GBX 2,528.00 and GBX 1,618.00, respectively. 

Based on the consistent dividend policy, robust cash generation, reopening of Primark stores and favourable valuation conducted above, we have given a “BUY” recommendation on Associated British Foods PLC at the current price of GBX 2,052.00 (as of 16 August 2021, at 7:50 AM GMT), with lower double-digit upside potential based on 35.36x Price/NTM Earnings (approx.) on FY21E Earnings Per Share (approx.).

Pearson PLC

Pearson PLC (LON: PSON) is a FTSE 100 index listed Company, which provides learning services by providing assessment, content, and digital solutions to universities, colleges, and schools.

Investment Rationale – BUY at GBX 780.20

• Improved financial position at the end of H1 FY21: Net debt reduced to £646 million (H1 FY20: £982 million) while available liquidity at the end of H1 FY20 was £1.6 billion. Moreover, operating cash flow surged on a headline basis by £224 million from an outflow of £214 million in the H1 FY20.
• The Company also showed strategic progress with implementing a new organizational structure, strategic review of international courseware, and launched a new college learning application for US students.
• From a technical standpoint, the stock price is nearly at the lower standard deviation of the Bolling Bands, while the RSI (~36.08) confirms the oversold position.
• In terms of forward 12-month – Price/Cash Flow and Price/Book valuation multiples are undervalued against the industry median of the Media & Publishing industry. Moreover, its dividend yield is higher than the industry median.

Key Risks

• The disruptive technology changes and cyber threats impose risk to its business model. Also, the inability to manage intellectual property rights could impair the value of core assets.
• The prolonged closure of schools and test centres can cause liquidity risk, and procrastinate its growth plans.

Financial Highlights (for the six months ended 30 June 2021, as on 30 July 2021)

 (Source: Company Website)

• During H1 FY21, underlying revenue surged 17% year-on-year to £1,597 million.
• The Company reported an adjusted profit of £127 million in H1 FY21 against the operating loss of £23 million in H1 FY20.
• Therefore, the Company declared an interim dividend of 6.3 pence, reflecting a 5% year increased on 6 pence of dividend paid for H1 FY20.
• At the end of H1 FY21, Pearson reported robust liquidity of approximately £1.4 billion.

One Year Share Price Chart

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

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

Conclusion

Pearson delivered strategic, operational, and financial progress in the H1 FY21, and showed a solid rebound from H1 FY20 with encouraging momentum in the underlying business. Its confidence in the outlook is reflected in the increase of dividend as well. The Company has also launched a new app, called Pearson+, which is a significant milestone in its direct-to-consumer strategy. Although, there are Covid-19 challenges in some of its major markets, Person is moving in the right direction to meet its current market expectations. The stock made a 52-week High and Low of GBX 909.00 and GBX 478.90, respectively.

Based on the growth in underlying revenue, strategic progress, confidence in the outlook, reduced net debt, with support from the valuation conducted above, we have given a “BUY” recommendation on Pearson PLC at the current price of GBX 780.20 (as on 16 August 2021, 7:40 AM GMT), with lower double-digit upside potential based on 29.27x 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

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