AB Foods shares 'significantly undervalued'

by Graeme Evans from interactive investor |

After a tough 18 months, those in the know say AB Foods shares are cheap given the firm's potential.

A few days after opening its biggest ever store, Associated British Foods (LSE:ABF) gave another reminder of the retail supremacy that fashion chain Primark continues to enjoy on the high street.

The 25% rise in Primark operating profits to £426 million for the six months to 2 March was driven by new store space and a significantly improved operating margin of 11.7% as the chain offset the sales impact of poor trading conditions in November.

Primark again represented the stand-out performance in another resolute set of results from the FTSE 100 index conglomerate, whose other operations cover sugar, agriculture, ingredients and groceries. Profits and earnings per share were flat at £627 million and 61.1p respectively, suppressed by continued weakness at AB Sugar.

Lower EU contracted sugar prices dented its UK and Spanish businesses, with a poor crop in China also causing last year's sugar interim profit of £106 million to slump to just £1 million this time. However, the group expects profitability to hold firm in the second half of the year as tighter EU stock levels and a reduction in crop areas underpin a recent recovery in spot prices. 

That's buoyed analysts at Credit Suisse, whose target price now stands at 2,750p based on expectations for continued strong trading in Primark and in the grocery division.

They said today:

"Coupled with the gradual recovery in the sugar price, better trading at Primark and some progress in problem areas, the prospects for 2019/20 are improving."

Source: TradingView   Past performance is not a guide to future performance

The broker believes that the forward price/earnings (PE) multiple of 16.6x for AB Foods when excluding sugar, as well as a valuation of 11.5x underlying earnings for Primark, significantly undervalued the company.

Their optimism is matched at UBS, whose analysts have a price target of 3,150p. Shares rose 2% to 2,550p today, with Primark's sales momentum and the group's stronger cash balances offset by the potential for FX pressure on the retailer's margin in the second half.

Shares have enjoyed a strong run in 2019, rising 25% so far but they are still a long way short of the 3,000p mark seen in late 2017.

Credit Suisse thinks the second half of the financial year has started well for Primark, with favourable weather and continued expansion in eastern Europe and the United States.

In the UK, where the world's biggest Primark store recently opened its doors in Birmingham, like-for-like sales in the first half grew by 0.6% as the group said its share of the clothing, footwear and accessories market "increased substantially".

Strong sales growth was also seen in Spain, France, Italy and Belgium but poor trading in Germany meant underlying sales across the eurozone fell 3.2% in the half. Primark has strengthened its management team in Germany, with preparations also underway to reduce selling space in a small number of stores.

The Primark operating margin of 11.7% compared with 9.8% a year earlier, helped by the weaker US dollar as well as better buying and tight stock management.

In other parts of the business, the Twinings Ovaltine grocery division lifted profits by 5% to £167 million after a 3% rise in revenues to £1.7 billion. However, this has been offset by the recent loss of a major bread contract at Allied Bakeries - impacting the next financial year and likely to result in action to reduce the cost base.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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