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 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 2,024.00

• The sugar prices have risen globally in recent months that shall support the business.
• ABF has robust cash generation through food business, which shall 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 (27.51) gives an oversold signal.  
• All major metrics (Price/Earnings, EV/Sales, EV/EBITDA, Price/Book, and Price/Cash Flow) of ABF reflect an undervalued position against the Consumer Non-Cyclicals sector.

Key Risks

• Economic recovery is derailed with spread of new variants of 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).
• 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.

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 

As Primark stores are reopened, ABF now expects profit for the full year. Moreover, higher prices in Europe and Africa and strong volumes in Illovo and China boosted the sugar revenue in Q3 FY21. 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. 

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 closing price of GBX 2,024.00 (as on 15 July 2021), with lower double-digit upside potential based on 33.47x 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.

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