Associated British Foods Plc

FTSE-100 listed Associated British Foods Plc (LON: ABF) is a London-based diversified Group, which is offering a wide range of products and services.

On 1 July 2021, the Company will release its trading update.

Rationale for Valuation – Hold at GBX 2,313.00

• Food businesses delivered exceptional increase in adjusted operating profit of 30%.
• The debt/equity ratio recorded by the Company in the past two years was considerably below the industry median. In H1 FY21, the debt/equity ratio was 0.40x.
• On a trailing 12 months, EV/Sales multiple of ABF is currently lower than the corresponding multiple of the Food & Tobacco industry. It reflects, shares are undervalued as compared to the industry.
• From a technical standpoint, 100-day SMA (GBX 2,208.36) and 14-Day RSI (37.38 levels) supports an upside potential.

Key Risks

• ABF operation was affected by the COVID-19 pandemic as Primark stores were closed due to the restriction measures put in place.
• The Company is facing an extremely volatile trading environment, which is leading to an increased cost to operate the business.
• Change in regulation pertinent to Food Safety and Product Integrity can lead to additional costs.

Financial Highlights (for the 24 weeks ended 27 February 2021 (H1 FY21), as on 20 April 2021)

(Source: Company Website)

• On a constant currency basis, the revenue in Grocery, Sugar, Agriculture and Ingredients was ahead of the first half of the previous year.
• In Grocery, Sugar, Agriculture and Ingredients businesses, the adjusted operating profit was well ahead of expectations.
• However, Primark's performance was impacted due to extensive store closures and restrictions on trading.
• The cash outflow was £860 million, with net cash before lease liabilities of £705 million.
• The Board has declared an interim dividend per share of 6.2 pence, which will be paid on 9 July 2021.

One Year Share Price Chart

 (Source: Refinitiv, Thomson Reuters)

Conclusion

Overall, in H2 FY21, the Company expects a softer performance. In AB Sugar, the full-year profit is expected to be ahead of last year, while it will also be in line with expectation. Moreover, the full-year profits at Ingredients and Agriculture will be in line with the previous year. In the second half of 2021, the grocery volumes are expected to be softer than the last year. The Company’s stores in England and Wales made record sales in the first week after reopening on 12 April. ABF has a decent balance sheet with good liquidity to meet the challenges ahead. Further, it will increase the retail selling space with an additional nine stores opening in H2 FY21. The stock made a 52-week low and high of GBX 1,613.50 and GBX 2,528.00, respectively.

Considering the uncertainties and market dynamics, we are currently maintaining the “Hold” stance on Associated British Foods Plc at the current price of GBX 2,313.00 (as on 21 April 2021 at 8:00 AM GMT) and will recommend fresh buying at the right time.

British American Tobacco Plc

British American Tobacco Plc (LON: BATS) is the FTSE 100 listed global holding Company, which deals in tobacco and nicotine products.

On 28 April 2021, the Company will hold its Annual General Meeting.

Rationale for Valuation – Hold at GBX 2,706.00

• On a trailing 12 months, EV/EBITDA, Price/Earnings and Price/Cash Flow multiples of the British American Tobacco Plc are currently lower than the corresponding multiples of the Food & Tobacco industry. It reflects, shares are undervalued as compared to the industry.
• The Company expects 2021 revenue growth on a constant exchange rate to be in the range of 3% to 5%, along with Mid-Single growth in adjusted diluted EPS on a constant exchange rate.
• The Company has decent fundamental metrics as it has maintained a net margin above 20% for the last three years.
• From a technical standpoint, 14-Day RSI (44.89 levels) supports an upside potential.

Key Risks

• BATS is exposed to regulatory norms and higher taxes related to tobacco sales.
• It is cognizant that combustible products pose a significant health risk, and thus, from a social aspect, it states that the only way to avoid these risks is not to start or quit.
• The Company is exposed to health-related risks, and it is putting strenuous efforts through its strategy to reduce the health impact on the business.

Recent News

On 1 April 2021, the Company had received notice from Jerry Fowden, as a Non-Executive Director of his resignation from the Board.

On 11 March 2021, the Company entered a strategic collaboration agreement with Organigram Inc. BATS subsidiary acquires 19.9% equity investment in Organigram.

Financial Highlights (for the year ended 31 December 2020 (FY20), as on 17 February 2021)

(Source: Company Website)

• The reported revenue was down by 0.4% YoY, while adjusted revenue increased by 3.3% YoY.
• Led by an increase in the Strategic portfolio, the Cigarette value share was up by 20 bps.
• On a reported basis, the profit from operations increased by 10.5% YoY, with an increase in an operating margin of 380 bps, driven by an improvement in the Group's operating performance.
• The Board has declared a full-year dividend per share of 215.6 pence, an increase of 2.5% YoY.
• With high cash, the Company has a strong liquidity profile, achieved operating cash flow conversion of more than 95%, and successfully raised £8.9 billion in new debt.

One Year Share Price Chart

 (Source: Refinitiv, Thomson Reuters)

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

Conclusion

On a constant currency basis, the 2021 revenue is expected to be in the range of 3%-5%, with a new categories revenue target of £5 billion in 2025. It also expects an operating cashflow conversion to be more than 90% in 2021. However, the Global tobacco industry showing a downtrend in 2021 and expected to be down by around 3%, due to Covid-19 uncertainties.

The Company is aiming to deleverage its balance sheet by bringing down net debt/adjusted EBITDA to around 3x by the end of 2021. BATS has anticipated a dividend pay-out ratio of 65% of adjusted diluted EPS well-supported by a strong liquidity position. Moreover, British American Tobacco has set a medium-term rating target of BBB+/Baa1, with a current rating of BBB+/Baa2. On 20 April 2021, the stock price was down more than 7% following a report that Joe Biden’s (U.S. President) administration was considering tobacco companies to lower the nicotine levels in all cigarettes, which were sold in the United States. The stock made a 52-week low and high of GBX 2,422.50 and GBX 3,308.50, respectively.

Considering the uncertainties and market dynamics, we are currently maintaining the “Hold” stance on British American Tobacco Plc at the current price of GBX 2,706.00 (as on 21 April 2021 at 8:00 AM GMT) and will recommend fresh buying at the right time.

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

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

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