Associated
British Foods ADR (ASBFY, $46.40): “A Long-Term Investment with a Skilled Management Team”
By: Joel
Kretz, AIM Program Student Analyst at Marquette University
Disclosure:
The AIM International Equity Fund currently holds this position. This article was
written by myself, and it expresses my own opinions. I am not receiving
compensation for it and I have no business relationship with any company whose
stock is mentioned in this article.
Summary
• Associated British Foods ADR (ASBFY) is a multinational company in
the food, ingredients, retail, and grocery spaces with a presence in primarily
the United Kingdom, United States, China, Germany, etc.
• ASBFY continues pursuing stakes
in other sugar producers as the European Farm Ministers agreed to abolish the
EU’s system of sugar production quotas on October 1, 2017.
• Insiders/Stakeholders have
bought 5,632,000 shares of the stock traded on the London Stock Exchange over
the past six months.
• The firm reported H1 adjusted
EPS of £46.10 vs. analyst consensus £44.50 on April 19, 2016.
• HSBC reaffirmed its buy rating
on Associated British Foods on April 26, 2016 with a $53.68 target price.
• AIM Program Student Analyst,
Joel Kretz, maintains his buy rating with a conservative $51.37 target price.
• ASBFY could be heading to new
52-week highs on the back of a strong results in its new retail, “$5
store-type,” Primark locations.
Key
points: ASBFY is not a short term growth play, but given a long term
investment time horizon, ASBFY is a stable company poised for long term growth
and ROI relative to lesser than normal inherent risk. The stock has achieved
average performance during the ongoing low commodity price environment; so it
is perceived that there is opportunity for reward with less risk. The company has
improved its balance sheet, diversified its revenue stream segmentally and
geographically, and is in a position to control its own destiny given its low
debt levels relative to peers.
Furthermore, the company’s
management is skilled enough to handle a potential “Brexit” from the European
Union. When considering potential investments in Europe, ASBFY is essentially
one of the safer bets given its revenue diversity and the relatively inelastic
nature of demand for its food products. The company made £613M in capital investments
in FY15 and reduced its total liabilities by £32M during the same period. Much
of the capex was allocated to growing its number of Primark store location in
the United States and France.
Consequently, retail sales from
these “$5 store-type” locations are expected to take ASBFY’s retail segment to
a higher proportion of total sales than previously. These sales contribute to
higher margins than food product sales, lending to expanding margins for the
company going forward. Management is confident in the future success of Primark
in the United States given Primark’s proven track record in Europe; and, this
strategy may even take shares of ASBFY to 52-week highs.
What
has the stock done lately?
Since AIM initiated coverage on
February 12, 2016, shares of ASBFY have appreciated 5.17%. This is due to two
key factors: general macroeconomic beta and the earnings beat on April 19,
2016. In the addition to positive macroeconomic factors going forward, further
price appreciation should result from continued, proven performance in the
company’s Primark locations.
Past
Year Performance: ASBFY has increased 10.42% in value over the past
year, but the stock is nonetheless on the bargain table for a consumer staple:
ASBFY's market valuation implies a ~10.71% and ~15.69% discounts to Kretz’s and
HSBC’s respective target prices. While there lacks the possibility for
“off-the-chart” return, there is solid potential for total return for this
consumer staple.
1-Year
Stock Chart
Source:
EDGAR
My
Takeaway
Associated British Foods’ insiders/stakeholders
are putting their own money where their mouths are by buying up shares over the
past 6 months; so why shouldn’t you believe in the company. ASBFY’s management
has prepared for commodity price downturns through acquisitions and revenue
diversification, both segmentally and geographically. Should there be a
“Brexit” or economic downturn in Europe, this company is poised to come out
stronger than competitors; and, through its revenue segment diversification,
the company is also shifting revenues into higher margin areas like retail.
Continued success through this strategy may entice insiders/stakeholders to buy
even more shares, which could push ASBFY to new 52-week highs sooner rather
than later. At worst, I expect London based Associated British Foods to be
poised for more stability than its hometown Chelsea Football Club with a
12-11-11 Premier League record!
1-Month
Stock Chart
Source:
EDGAR
