Thursday, April 28, 2016

60th AIM Student Equity Update by Joel Kretz. Associated British Foods ADR (ASBFY): “Mates hungry for margin expansion”

 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.
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