Associated British Foods PLC – Facing no material disruption to supply change with Brexit transition.

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

On 22 February 2021, ABF expects to report pre-closing trading update.

Rationale for Valuation – Buy at GBX 2,230.00

• From the technical standpoint, 14-day RSI (47.11) which is supporting the upside movement.
• The Company has decent fundamental metrics as it has maintained a gross margin above 23% and EBITDA margin above 11%, for the last five years.
• The revenue from all divisions except Retail performed better than the last year.
• In order to deal with retail store closures, the Group has been implementing prudent operational plans to reduce the cost significantly.

Key Risks

• Fluctuations in the raw materials price and availability of operating inputs could impact the profitability of ABF.
• Failure to achieve the anticipated efficiency cost-saving measures or difficulties in implementing supply chain investment could result in a greater impact on margins.

Trading Update for the 16 weeks to 2 January 2021 (as on 14 January 2021)

 (Source: Company Website)

• During the above-mentioned period, revenue from continuing operations fell 13% year-on-year at constant currency, primarily due to retail business.
• However, Agriculture, Grocery, Sugar and Ingredients business demonstrated decent growth against the same period last year.
• Under the retail business, 24% of stores are still closed.
• Due to the recent increase in Covid-19 cases, the Company suspended the earnings guidance.

One Year Share Price Chart

 (Source: Kalkine Group, Refinitiv) 

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

Conclusion

It is evident that the impact of closure of Primark’s store is significant, and therefore, adjusted operating profit for Primark is anticipated to be lower than last year. However, the performance of other divisions has been robust and their expectations for profitability remained ahead of last year. Looking ahead, the Group will continue to build the pipeline of new stores to tap market opportunities. The stock made a 52-week high and low of GBX 2,730.00 and GBX 1,554.00, respectively.

Based on the short-term retail uncertainties, strong pipeline, resilient business model and capabilities, supported from the valuation as done using the above method, we have given a “Buy” stance on Associated British Foods PLC at the current market price of GBX 2,230.00 (as on 15 January 2021, before the market close at 10:50 AM GMT), while we look forward to reviewing the performance once all the retail stores are open.

Taylor Wimpey PLC – Operating with a strong order book and cost-efficiency.

Taylor Wimpey PLC (LON: TW.) is a FTSE 100 listed residential property developer, which builds a wide range of properties in the different price range. It produces both private and affordable homes.

On 2 March 2021, the Company expects to report FY20 results.

Rationale for Valuation – Buy at GBX 162.50

• Taylor Wimpey has strengthened the business for the long term by enhancing build quality, increasing production capacity, and improving customer service.
• In H1 FY20, the current ratio was higher, while the debt/equity ratio was lesser than the industry median, reflecting that the Company is less leveraged and yet managing the short-term obligations well.
• Over the past four years (FY15 – FY19), the Company’s revenue has surged from GBP 3,139.8 million in FY15 to GBP 4,341.3 million in FY19, representing a compounded annual growth rate (CAGR) of ~8.44%.
• From a technical standpoint, 14-day RSI (46.91) is supporting the upside potential.
• The Company is now operating nearly at normal capacity with a product profile well positioned to meet customer demand. It has excellent customer and construction quality scores, which reflects the potential to serve customers in a responsible manner.
• It is well-placed to achieve the medium-term target of 21-22% in operating margin.

Key Risks

• The performance can be impacted by changes in inflation and interest rates amid a volatile macroeconomic environment, the unavailability of sufficient borrowing facilities, and availability of raw materials, suppliers, and sub-contractors.
• Also, the change in a complex regulatory environment can lead to a considerable delay in project completions. Furthermore, the unavailability of land can also impact the volume targets.

Trading statement for the year ended 31 December 2020 (as on 14 January 2021)

• FY20 performance is expected to be in line with market expectations.
• The Company made significant new investments in H2 FY20 since high-quality land was available at attractive prices.
• The Group also has an excellent order book and improved margins to ensure reliable returns for stakeholders over the medium term.
• As of 31 December 2020, the total order book valued at £2,684 million (31 December 2019: £2,176 million).
• At the end of FY20, liquidity position held strong with net cash of around £719 million.

One Year Share Price Chart

 (Source: Kalkine Group, Refinitiv) 

Valuation Methodology: Price/Book Approach (NTM) (Illustrative)

Conclusion

The stamp duty holiday has been incentivizing buyers and vendors to close deals before the March 2021 ends. As a part of the stamp duty holiday measure, the threshold for stamp duty has temporarily increased from the previous rate of GBP 125,000 to GBP 500,000. Meanwhile, the quick recovery of the housing market and resilient trading is testament to the underlying strength of demand and supportive lending backdrop. Taylor Wimpey has a growing high-quality landbank and a robust balance sheet, which is likely to grow the business further whilst generating compelling returns. It is well-positioned for strong progress and delivers enhanced shareholder value with a renewed focus on costs and efficiency.

Based on the business capability, industry prospects, and support from the valuation as done using the above method, we have given a “Buy” stance on Taylor Wimpey PLC at the current market price of GBX 162.50 (as on 15 January 2021, before the market close at 11.05 AM GMT), with lower double-digit upside potential based on 1.60x Price/Book (approx.) on FY20E book value per share (approx.).

*All forecasted figures and Industry/Peer Information have been taken from Refinitiv, Thomson Reuters.

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

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