Associated British Foods is ‘a fundamentally strong business’ with good future prospects, leading analysts to take ‘a positive stance on the group’s equity’ according to Shore Capital analysts Clive Black and Darren Shirley.
Shares in AB Foods closed up 0.9% at 1,954.05 pence in London on Friday afternoon. Shore rated it ’buy’.
The London-based food producer, which also operates the clothing retail chain Primark, is due to issue a trading statement for its third quarter on Monday.
In its interim results for the 24 weeks ended March 4, AB Foods had said revenue increased 21% to £9.56 billion from £7.88 billion the previous year. Pretax profit was ‘in line’ at £644 million, up from £635 million. Basic earnings per share increased by 11% to 67.0p from 60.3p, although adjusted EPS decreased by 2.8% to 62.0p from 63.8p each.
AB Foods at the time was cautiously optimistic, saying that adjusted operating profit and adjusted EPS should ‘be broadly in line with the previous financial year.’
Shore on Friday said it was ‘keen to see’ if AB Foods reaffirmed its prediction of ‘broadly flat’ earnings. The broker said it expects a pretax profit of £1.39 billion for financial 2023, with earnings of 131.7p per share.
Shore added that AB Foods ‘has pleasant virtues from an investment thesis perspective,’ including an ongoing buyback programme.
‘We have a positive stance on the group’s equity, believing that it is a fundamentally strong business where multiple headwinds are turning into tailwinds, albeit at varying speeds,’ it continued.
In AB Foods’ Agriculture division, Shore said that ‘no fireworks are anticipated’ despite the ‘tumultuous’ effects of the ‘heinous’ Russian invasion of Ukraine. It welcomed recent expansions, such as AB Foods’ 215p per share acquisition of National Milk Records PLC earlier this month.
‘We keep an eye on weather patterns, particularly in North America, where early summer conditions are very dry, as a key potential indicator of northern hemisphere pricing for core arable crops,’ Shore added.
In the Grocery division, Shore said revenues have been driven by inflation but with some adverse effects on volumes; the US arm, however, was ‘performing well’ and seemed likely to continue doing so. Shore said: ‘Long time stars of the show, Twinings and Ovaltine, have recently recorded more mixed trading momentum, notably the latter in Asia, whilst in the UK we shall be interested to see if Allied Bakeries has sustaine the muted improvement in-trading performance from H1.’
On the Ingredients business, which ‘recovered profitability robustly’ earlier this year, Shore said: ‘We feel that ABF’s Ingredients division is perhaps a little under a bushel in terms of investor interest and understanding, especially if recent and ongoing investment builds trading profit momentum.’ In Sugar, Shore anticipates ‘a higher and more resilient trading profit base’ with ‘a poor recent UK beet crop’ offset by stronger performance in Africa, but said the division may be impacted by higher energy costs.
Looking ahead, Shore was optimistic about AB Foods’ retail outlook, saying that ‘there is a spring in Primark’s step’ as the chain ‘has been trading well recently’ and anticipating that warm UK weather ‘may have made for good seasonal sales’. This was in contrast to AB Foods’ statement in March that ‘we remain cautious about the resilience of consumer spending in the face of ongoing inflation in the cost of living and higher interest rates,’ although it did expect like-for-like sales growth in the second half year.
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