Associated British Foods Plc - Food Businesses Continuing to Perform Exceptionally Well while the Group operating with Strong Cash Position

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

ABF’s Segment Strength
Led by excellent sales of herbal teas, growth in black teas, and new ranges of infusions in the UK, US, and France, the Twinings revenues were ahead of last year. AB World Foods achieved decent sales growth, due to an increased Patak’s sales in Europe and North America, and robust sales for Blue Dragon in the UK. AB Mauri has delivered operating profit and sales growth. Grocery division has attained excellent profit and margin growth, Primark profit was ahead of the anticipations, and Sugar division is on track to deliver a material improvement in profit for the full year. The group has a strong balance sheet and improved cash flow.

Financial Highlights (for the 24 weeks Ended 29 February 2020) – Reflecting Encouraging First Half Trading, with Strong Balance Sheet

(Source: Presentation, Company Website)

For the first half of 2020, revenue for the group of £7.6 billion was 3%ahead at constant currency and 2% ahead of last year at actual exchange rates. Adjusted profit before tax for H1 FY2020 increased by 1% at actual exchange rates to £636 million as compared with the corresponding period of the last year. Adjusted earnings per share rose by one per cent at actual currency rates. Led by higher adjusted operating profit and lower capital expenditure in the food businesses following the completion of several major projects last year, the net cash flow increased as compared with the corresponding period of the last year. Moreover, the management has decided not to declare an interim dividend.

Share Price Performance

Daily Chart as at May-07-20, before the market closed (Source: Refinitiv, Thomson Reuters)

Associated British Foods Plc’s shares were trading at GBX 1,773.10 before the market close (at 1:30 PM GMT+1) on 7th May 2020 and were up by 4.55% versus the previous day closing price. Stock 52 weeks High and Low are GBX 2,730.00/GBX 1,554.00.

Valuation Methodology


Valuation Metrics

(Source: LSE)

As on 30^th April 2020, the Price to Earnings and EV to EBITDA multiple of the ABF were around 17.1x and 7.3x, respectively, which were lower as compared to the Food producers industry multiples. It reflects, shares are undervalued against its peers.

Conclusion
The group also has a strong balance sheet and financial resources to meet the challenges ahead.The company has delivered encouraging first-half trading, with food businesses continuing to perform exceptionally well, rapid action taken on Primark and expectation for a gradual restoration of sales, and strong cash position at half year-end. In the medium to long term outlook, the company maintains its positive view for the shareholders. In the Sugar, Grocery, Ingredients and Agriculture businesses, the expectation for the aggregate operating result is unchanged in the second half of 2020. However, due to an unprecedented crisis of Covid-19, it is too early to provide earnings guidance for the FY20.

Based on the decent prospects, which are supported by valuation done using the above method, we have given a “Buy” recommendation at the closing price of GBX 1,696 (as on 6th May 2020), with single-digit upside potential based 22.21x NTM Price/Earnings (approx.) on FY20E earnings per share (approx.).

Beazley PLC – Reflecting Strong Investment Return, with Three Decades of Experience in Providing clients

Beazley PLC (LON: BEZ) operates as a specialist insurance company with major operations in Europe, the United States and the Pacific region.

On 23^rd July 2020, the company will announce its interim results.

Trading Update (for the three months ended 31^st March 2020) – Reflecting Strong Growth in three of the Divisions

(Source: Trading Update, Company Website)

For the three months ended 31 March 2020, the gross premiums written surged by 13% to $840 millionas compared with the corresponding period of the last year (31 March 2019: $743 million). The group has shown a strong growth of 23% in three of the divisions. The political, accident and contingency division for the current period increased by 6%. Rate changes in the market were mainly encouraging with three divisions attaining double-digit increases and with an average rate increase of 8%. On 31st March 2020, the investment and cash surged by 13% to $5,774 million (31 March 2019: $5,095 million). The year to date (YTD) investment loss to 31st March 2020 stood at $55 million, representing a loss of 1% (31 March 2019: investment gain of $98 million or 2%). From Covid-19, the group expect the total claims on first-party business to be approximately $170 million net of reinsurance.

Share Price Performance

Daily Chart as at May-07-20, before the market closed (Source: Refinitiv, Thomson Reuters)

Beazley PLC’s shares were trading at GBX 383 before the market close (at 2:22 PM GMT+1) on 7th May 2020 and were down by 0.78% versus the previous day closing price. Stock 52 weeks High and Low are GBX 634.00/GBX 294.20.

Valuation Methodology

*Peers: Lancashire Holdings Ltd, Direct Line Insurance Group Plc, Hastings Group Holdings Plc, and Sabre Insurance Group Plc.

*1USD to GBP: 0.810832.

Growth Catalysts
BEZ is expecting robust premium growth with rising premium rates in future. Their new and existing insurance lines have been consistently generating profitability. The demand for specialist insurance products is also likely to rise in Canada, Europe and Asia. Over the past two years, renewal business has been growing over 10% and expected to rise in future too.

Conclusion
In the three months ended 31 March 2020, the group has experienced double-digit growth in Gross premiums, investments and cash. Moreover, the company has delivered strong investment returns and premium growth in the financial year.The company and sector are facing challenging times amid ongoing uncertainty, but the group has a growing presence internationally and has strong, diversified businesses in the US and Lloyd's.  

Based on the decent prospects which are supported by valuation done using the above method, we have given a “Buy” recommendation at the current price of GBX 373.65 (as on 7th May 2020, before the market close at 8:02 AM GMT+1) with lower double-digit upside potential based 1.74x NTM Price/Book Value (approx.) on FY20E book value per share (approx.).

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.
*The “Buy” recommendation is also valid for the current price as covered in the report as on 7^th May 2020.

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