Associated British Foods PLC

Associated British Foods PLC (LON: ABF) is an FTSE 100 listed Company, which is engaged in the food processing and retailing business.

On 26 April 2022, the Company will release interim results for the 24 weeks period to 5 March 2022.

Investment Rationale – BUY at GBX 1,652.50

• Solid Guidance: The Company had expected a significant year-on-year growth in sales and adjusted operating profit during H1 FY22. Furthermore, the sales and adjusted operating profit were also expected to remain ahead of pre-Covid-19 levels.
• Decent Profitability: ABF reported a decent jump in basic earnings per share in FY21 and recommended special dividends.
• Positive Funding Update: The successful launch of public bond of £400 million at 2.5% will diversify the funding sources and extend the duration of borrowings.
• Technical Indicator: From a technical standpoint, the stock price is trading around the lower Bollinger Band, illustrating a bullish price momentum.

Risk Assessments

• Emerging Risk: The escalating cost of energy, logistics, and commodities can hurt Grocery, Sugar, Ingredients, and Agriculture businesses.
• Ukraine Tension: The mounting concern over the Russian invasion in Ukraine can continue to weigh on the equity market.

H1 FY22 Pre-Close Trading Update (for the 24 weeks to 5 March 2022, as on 28 February 2022)

• Grocery Business: For the Grocery business division, the Company expects decent growth of around 2% in the revenue during H1 FY22.
• Encouraging Primark Sales: The Company expects H1 FY22 Primark sales to be over 60% ahead of last year.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY22E)

Conclusion

ABF has shown a strong trading momentum in FY22 so far. Moreover, the global sugar demand shall continue to surpass the production in FY22 as well, which shall further generate pricing opportunities. The stock made a 52 week High and Low of GBX 2,509.50 and GBX 1,584.50, respectively.

Please note markets are trading in a highly volatile zone currently due to certain macro-economic and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

Based on decent revenue growth during FY21, strong balance sheet, consistent dividend payments, and support from the valuation as done using the above method, we have given a “BUY” recommendation on Associated British Foods PLC at the current market price of GBX 1,652.50 (as on 08 March 2022 at 08:09 AM GMT), with lower double-digit upside potential based on 13.27x Price/NTM Earnings (approx.) on FY22E Earnings per share (approx.).

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Note 3: Dividend Yield may vary as per the stock price movement.

Note 4: Target Price refers to a price level which the stock is expected to reach as per the relative valuation method and or technical analysis taking into consideration both short-term and long-term scenarios. 

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavorable movement in the stock prices.

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