Research that is free to access for all investors. Companies commission these providers to write research about them.
Brokers who write research on their corporate clients and make it available through our main bundle offering.
Research that is paid for directly by asset managers. Only accessible to institutional investors permissioned for access.
Event in Progress:
View the latest research on other companies in the sector.
Associated British Foods^ (ABF, Buy at 2,273p) - An act of insane industrial vandalism
Associated British Foods plc
Associated British Foods^ (ABF, Buy at 2,273p) - Sorting the problem kids out...
ABF’s acquisition of Hovis will unlock significant synergies in production and distribution and should provide the platform to invest in innovation. Both businesses currently generate substantial operating losses—£30m for Allied Bakeries and £6.9m for Hovis in FY’24, but a merger has the potential for turning the combined businesses profitable. While the deal would face regulatory scrutiny, precedents in similar industries do suggest an approval is possible as one company’s survival is at risk. We think the deal also reflects positively on the group as it continues to address loss making businesses (Allied Bakeries, Azucarera and Vivergo, losing a combined c. £100m), giving us hope that the group could consider ways to deliver value for shareholders from the Sugar business, as we discussed in our recent note.
What happened? As trailed in the press last week (e.g. see Sky News, 6 August), AB Foods has agreed to purchase the Hovis brand (Hovis Group Limited). The financial details have not been disclosed, implying that the deal is not material in the context of AB Foods, but the statement notes that this will create a profitable company, which implies material synergy opportunities. The deal is subject to regulatory approval. BNPP Exane View: modest earnings accretion We have three initial takeaways: 1. Two loaves are stronger than one. We see a sensible strategic logic for putting together the 135 year old Hovis brand (from ''hominis vis'', ''the strength of man'') with the 75-year old Kingsmill brand owned by AB Foods'' Allied Bakeries. The pre-sliced bread market has been under pressure from changing consumer tastes and inflation, so consolidation of brands makes sense. ABF has previously said that it expects Allied Bakeries to lose around GBP 30m in the current financial year: a profitable combined business could invest in innovation to reduce its dependence on the declining pre-sliced packaged bread market, and invest in other bread and bakery production (sourdough, naan bread etc.). 2. Profitability rising. Synergies have not been disclosed but in order to become a profitable business, as the company expects, these must be at least GBP 30m, and in our calculations we assume the GBP 50m referenced in the press. According to filed accounts, Hovis made an operating profit of GBP c.3m in FY Sep-24 while Allied Bakeries made an operating loss of GBP c.24m in FY Aug-24. AB Foods has three problem assets which lose a combined GBP c.100m: Allied Bakeries in Grocery and Azucarera Spain and Vivergo in Sugar. This potentially deals with one. 3. Assessing the dough. We present a framework outlining the potential impact on AB Foods'' PandL, based on achieving net synergies of GBP 50m by FY29 and assuming a total consideration of GBP 75m, consistent with press...
Sugar’s earnings are volatile and have a disproportionate impact on ABF’s share price, which dissuades investors from buying the stock. In this note, we take an in-depth look at ABF Sugar. We show it is a quality business that generates better returns than peers, but one that has material short-term earnings risks. We calculate that a carve-out of the ABF Sugar business could lead to an 13-15% higher value for shareholders, and a potential disposal could generate more. However, we turn positive on ABF even with Sugar. We think the market underestimates the pace of recovery of Sugar profits, with actions already taken to address underperforming businesses. The market also underestimates the margin tailwinds at Primark, not just from FX but also efficiencies and operational leverage. We forecast a potent combination of 13% adj. EPS CAGR over FY’25-28E, with c. 7% p.a. in dividends and buybacks. BUY.
Associated British Foods^ (ABF, Buy at 2,080p) - Sugar update - decisive action
Associated British Foods^ (ABF, Buy from under review at 2,088p) - Return to the BUY roster after review
AB Foods confirmed this morning that it is in discussions with Endless LLP regarding a potential transaction involving Allied Bakeries and Hovis Ltd. Allied Bakeries has faced ongoing challenges amid a highly competitive UK bakery market, characterised by competition for volumes, a price-sensitive consumer and retail landscape—conditions under which Hovis also reported an operating loss in FY’23. A potential merger of equals could unlock significant cost efficiencies necessary for the turnaround of both businesses. A potential merger of equals could unlock significant cost efficiencies necessary for the turnaround of both businesses. While a transaction between the second- and third-largest players in the market would likely attract regulatory scrutiny, we view such a deal as being in the long-term interests of all stakeholders, as both companies may struggle to remain viable independently.
Associated British Foods^ (ABF, Under Review at 2,050p) - A decisive move on plant bread?
We have adjusted our estimates following yesterday''s AB Foods H1 results. Our FY Sep-25e EPS forecast falls by c.3.5% to GBp 181. Our Adj EBIT forecast of GBP 1,804m includes losses of GBP 29m in Sugar (guidance for a loss of up to GBP 40m) and Retail profits of GBP 1,163m. This implies Primark H2 operating margin of c.12%. Our target price remains at GBp 2,300 based on our DCF and SOTP valuations. For a recap of the H1 results, see H1 results first take and H1 results off the call. We do not consider the changes to be material; our rating is unchanged.
Associated British Foods^ (ABF, Under Review from Buy, at 2,239p) - Bitter Taste
Weak 1H reporting by AB Foods this morning with worsening LfL trends at Primark to -2.5% (from -1.9% at 1Q), including UK and Ireland still at -6.0% LfL. The bigger miss is at Sugar where full year guidance has been cut to an up to £40m loss now (£50-75m profit previously) where persistent low European sugar prices and loss at Vivergo have been worse than expected. The guidance cut would imply a 6-7% downgrade to consensus earnings. Various restructuring and strategic reviews have been announced today for the struggling businesses – Azucarera Spanish sugar business, Vivergo bioethanol business and Allied Bakeries. Today’s results give further credence to our argument that a sale or carve out of the volatile Sugar business into a separate entity would make the ABF investment case more compelling.
H1 results: what happened? Today AB Foods reports Adj. PBT of GBP 818m (BNPP Exane GBP 833m) and Adj. EPS 83.6p (Bloomberg consensus GBp 85p, BNPP 82.8p) with stronger than expected Primark margins but weaker like-for-like sales and disappointing news in Sugar. FY Sep-25 guidance for Primark to achieve ''low-single digit sales growth'' is maintained, and group guidance includes the current US tariff impact, but Sugar guidance is cut materially. BNPP Exane View: sugar and Primark LFLs may be tough to look through There''s quite a lot in today''s statement. Primark H1 margins of 12.1% were well ahead of consensus +11.4% expectations. However, LFLs deteriorated from -1.9% in Q1 to -2.5% for H1, implying Q2 around -4%. Management expects Primark H2 margins to be lower than H1 but full year Primark guidance is unchanged. Sugar profits missed expectations, dragging down H1 group earnings, and full year Sugar profit guidance has been cut from GBP 50-75m to ''up to'' a loss of GBP 40m, due to several factors. It also flags that the Sugar recovery may take longer than expected. Likely direction of consensus: Management does not explicitly guide to a level of profits, but our first take would be to expect consensus profit forecasts to fall mid-single digits, and consensus may also flatten the FY26 Sugar recovery that had been expected. FY Sep-25e fully diluted Adj. EPS Bloomberg consensus is currently 186p. Anticipated market reaction AB Foods shares are +10% year to date compared with the FTSE100 +3% and FTSE350 Retail Sector +6%. Bulls will point to the strong profit and margin performance at Primark and comments that Primark UKandI have seen early encouraging signs of improvement in H2. Bears will point to likely consensus EPS cuts due to Sugar and also weaker Primark LFLs than expected. We expect AB Foods shares to open mid-single digits lower, given their recent run. Conference call The earnings call is at 09.00 UK, webcast here and in person at 5...
Associated British Foods^ (ABF, Buy at 1,941p) - Resignation of Primark CEO
We have adjusted our AB Foods estimates and target price following the company''s trading update (see our first take note here). We lower our FY Sep-25 Group EPS forecast by c.2%. We model Retail profit of GBP 1,136m, a margin of 11.7%. We do not consider the changes to be material; our rating is unchanged.
Q1 highlighted weak trading at Primark in the UK and Ireland at -6.0% LfL, worse than the in-store retail trends at peers NEXT and M&S. Management noted a sense of shock and concern amongst the less affluent shoppers, Primark’s key customer base, immediately before and post the Budget, and pleasingly, the UK returned to LfL growth in December. This is similar to trends seen at other discounters like B&M and Poundland. Guidance for Primark sales growth has been cut to low-single digit in FY’25E (from mid-single digit) but the rest of the guidance remains unchanged. With earnings sentiment turning further negative combined with risks to Primark from UK’s economic performance, we take a more cautious stance on the shares and move to HOLD (from BUY), with a reduced 1,900p TP (from 2,800p). There is a solid medium-term story here, but the Sugar business does make the earnings much more volatile. We argue that the bull case will be a lot more compelling if the Group carved out the more volatile Sugar business into a separate entity.
Associated British Foods^ (ABF, Buy at 1,937p) - Poor Primark UK, c2% shave to EPS.
We have adjusted our AB Foods estimates, including modelling Primark''s geographical segments following the company''s updated disclosure. We do not consider the changes to be material; our rating is unchanged.
Good medium-term visibility, not much change to near-term outlook AB Foods'' adj. EPS was c.3% ahead of consensus and the combined size of its new share buyback and a special dividend was larger than expected. Management''s FY25 guidance implies Primark profits should grow mid-single digits, and its comments suggest that recent trading has followed weather patterns. Food Division profits are likely to fall in the year ahead due to Sugar, which was already known. We already had a buyback in our forecasts, so our estimates are broadly unchanged. Key news: balance sheet, disclosure and growth algorithm The FY24 numbers were relatively unsurprising, though three things stood out to us. First, a special dividend and a reloaded buyback programme confirm that surplus returns are now a recurring part of the story. Second, we welcome the extra regional disclosure for Primark, summarised in Figure 6. And third, management confirmed that it expects new store openings to add 4-5% sales growth to Primark for the foreseeable future. FY Sep-25 moving parts Management said that Autumn/Winter trading had started well, albeit the implication is that the warmer weather in October has somewhat put a brake on growth. LFLs are a key driver of sentiment, and management''s guidance suggests low-single digit LFL sales growth in FY25. Higher gross margins and warehouse/checkout automation should help to offset cost inflation, including wage inflation, leaving Primark margins broadly flat. Grocery profits are likely to be held back by consumer oils while there was no change to the Sugar outlook. Reiterate Neutral Having cut FY Sep-25 EPS by 13% at the pre-close stage, our estimates rise c.2% on a slightly larger buyback. Our DCF/SOTP-based target price remains at GBp 2,500 and we maintain our Neutral rating.
Associated British Foods^ (ABF, Buy at 2,289p) - Strong year, bright ongoing prospects
Associated British Foods^ (ABF, Buy at 2,204p) - Setting out new expectations
Pre-close update disappoints AB Foods pulled forward its H2 trading update by a couple of days. The takeaway was that a weak Sugar outlook triggers significant FY Sep-25 earnings downgrades, while Primark assumptions are largely untouched. Primark momentum remains the main debate; we maintain our Neutral rating. Sugar outlook - a bitter pill Management guided Sugar profits in FY Sep-25 of GBP 50-75m, a sharp reduction compared with consensus GBP c.240m. Within the segment, we expect British Sugar to swing into losses as high contracted prices paid to farmers (GBP 40/t) collide with a sharp drop in European sugar prices of more than EUR 300/t. The price decline reflects a sugar surplus as more beet is drilled, yields rise, and sugar from Ukraine hits the market. This segment drives the vast majority of downgrades today. Primark - more stable, all about like for likes Despite soft sales in the second half, Primark looks set to deliver FY Sep-24 profits as expected thanks to a robust margin recovery during the year. Looking to FY Sep-25, c.4-5% space growth and flat EBIT margins mean that profit growth should be fairly modest unless like for like sales can accelerate. Whether Primark can achieve this is central to the investment debate, in our view. Cutting target price to GBp 2,500, remain Neutral In this short note we get our forecasts in shape, principally by cutting our Sugar forecasts but also trimming Grocery. As a result, our FY Sep-25 adj. EPS falls by 13%. Since Sugar profits are expected to recover in FY Sep-26, our DCF/SOTP-based target price falls by a more modest amount to GBp 2,500 (from GBp 2,650). As we wrote in Setting up shop for the Fall, we''re on the sidelines while we wait for evidence that Primark''s sales growth can accelerate. At today''s share price, the stock trades on c.12x CY25 P/E, and we prefer MandS (+) which in our view has stronger momentum.
Associated British Foods^ (ABF, Buy at 2,483p) - FY24 TS preview– where are we on the cosmos?
Pepco’s 3Q’24 trading update yesterday provided a positive read across to ABF’s Primark business. The momentum in Pepco Group gross margin demonstrated at the half year results (+480bps yoy in 1H24) continued strongly into 3Q driven by Pepco division, and the company noted that it has recovered (and potentially overshot) the 500bps gross margin loss over the previous 18 months. ABF is seeing a similar recovery in gross margins, and this suggests that Primark’s >11.3% EBIT margin target for 2H’24E appears achievable. LfLs at Pepco continue to be in decline, but it is partly down to company specific issues, and we still expect ABF to deliver LSD LfLs in 2H’24E. Shares have pulled back in recent weeks on the back of a continuing weak consumer and rising freight costs, but we note ABF is not exposed to spot freight prices and consumer spending outlook is on an improving curve.
We have adjusted our estimates, reflecting a reassessment of AB Foods'' financial charges and marking to market for currency. This has a minor impact on our EPS forecasts. We do not consider the changes to be material; our rating is unchanged.
Associated British Foods^ (ABF, Buy at 2,701p) - Setting out forecast upgrades
The best interim results in 19 years Earlier this week, AB Foods published its interim results. H1 adj. PBT beat consensus by c.11% and George Weston called them the best interim results in his 19 years as CEO. Off the back of these strong numbers, we raise our estimates and our Target Price by c.5-8%. Management signalled that the environment and margins have normalised, and that it would now focus on growth. The key debate is whether Primark can sustain healthy LFL sales growth beyond recovery. It has a number of levers, such as digital and click and collect, but at this stage we maintain our Neutral rating. Margins beat across the board Group H1 Adj. EBIT margins of 9.8% (vs. consensus 8.7%) are the highest H1 margin print we have in our model going back to 2005. This performance was fuelled by much-reduced losses at Vivergo (we estimate losses of GBP c.10m for FY24); a strong Grocery performance driven by the ''sparkling'' US-focused brands; and Primark outperformance (Adj EBIT margin of 11.3% vs. consensus 10.8%). Primark to focus on growth The focus now returns to the Primark growth agenda. This will be driven primarily by store expansion, but management also expects like for like sales growth. In turn, LFLs should be driven by real income growth, digital initiatives including click and collect (which drive LFLs by c.+100bps), brand investment, and the annualization of store openings in Italy, which have lapped very strong openings (and hence dampened LFLs). Price perception and Germany (see Figures 5 and 6) remain key debates. Remaining Neutral Increasing Primark''s FY24E margins and factoring in improved profitability in other divisions drives a c.7% earnings upgrade. Our DCF/SOTP derived target price rises to 2,700p (from 2,500p), which would imply CY24E P/E 13.5x and CY25E P/E 12.6x. We maintain our Neutral rating.
Associated British Foods^ (ABF, Buy at 2,506p) - H1 FY24 management reflections
Interims, 24 weeks ended 2 March 2024, Group Adj. PBT was £911m, +37% YoY, and ahead of consensus expectations of £822m (Visible Alpha) following a strong performance across all businesses. Net cash was £668m, (LY: £586m) following free cash flow of £468m (LY -£510m) reflecting profit growth and a lower working capital movement. Primark: Following a slow start to the year, total sales +7.5% (cc) YoY with LfL sales at +2.1% YoY in line with P1 trends. Across geographies, YoY LfLs were: UK: +3.6% (P1: +3.8%), Europe: +1.5% (P1: +1.3%). Total US sales were: +38.4% (P1: +45%). More recently, total sales (in the last 8 weeks) increased by 6.3%. Due to prolonged colder weather, ASP was higher than expected in the period across cold-weather products. As such, Primark operating profits were £508m, +46% (cc) YoY, with operating margins at 11.3% (LY: 8.3%) reflecting improved product gross margin following the annualisation of prior year price increases and lower material and freight costs. Management has been stepping up investment across technology, digital and customer activities to support growth and expects this investment to continue to increase over the medium term. Elsewhere, Sugar profits were £125m, +74% (cc) YoY (versus consensus £112m) driven in part by strong prices in its European businesses. Grocery profits were £230m, +39% (cc) YoY (versus consensus £194m) driven by last year's price increases to offset input cost inflation. The interims dividend is 20.7p (LY: 14.2p). Outlook At Primark, management now expects a moderate improvement in adj operating margin in H2 versus H1, albeit with a step-up in investment to support medium-term growth (Visible Alpha H2 consensus 11%). In Grocery, management expects strong profitability of US-focused brands to normalise while Sugar is expected to see a substantial improvement in profitability as per previous guidance. Our View There is clearly scope for upgrades today following the strong margin performance across all businesses. While the valuation/earnings growth profile may not be particularly eye-catching, we recognise that sentiment is more likely to be driven by earnings momentum, which is accelerating.
Associated British Foods^ (ABF, Buy at 2,506p) - Significant beat - Upgrades
1H’24 results are significantly ahead of market expectations with adj. operating profit expanding +39% yoy (consensus +25%). Primark reported a solid +2.1% LfL growth and operating margin expanded to 11.3% from 8.3% vs. consensus of 10.8%. Beitish Sugar production is expected to be ahead of prior expectations at 1.1m tonnes, which boasts well for strong 2H profits after 48% growth in 1H. Guidance for full year has been raised with Primark 2H margins expected to be slightly above the 11.3% in 1H, better production at British Sugar, and more optimism on Grocery and Ingredients than at the start of the year. Click and Collect is being expended to all stores in England, Wales and Scotland. The strong results ensure potential for further cash returns via specials and or buybacks at end of FY’24E. Primark’s store expansion program, further margin potential, and return on investments into capacity expansion in food should combine to deliver double-digit shareholder returns, including 5-6% via dividends and buybacks over the medium term. Remain BUY.
Two key factors will impact ABF’s 1H’24E results – progress on profitability at Primark and British Sugar. We expect the group to post >10.5% EBIT margins at Primark and reiterate good visibility for a substantial improvement in Sugar profitability in FY’24E. We expect a continuation of low-single-digit LfL sales growth at Primark given the weak UK and European retail data but look forward to hearing more on the development of click and collect. FY’24E guidance should be maintained, but with more confidence around the achievability of Primark margins and Sugar profits, stability in its Grocery business, and a year of strong cash generation, focus on <7x EV/EBITDA will rise. Double-digit shareholder returns are achievable, including 5-6% via dividends and buybacks over the medium term. BUY
Associated British Foods^ (ABF, Buy at 2,432p) - Are the stars aligning?
Solid Retail LfLs, a margin upgrade for Primark, and better than expected starts to the year in Grocery and Ingredients lead to further consensus upgrades post 1Q trading. Primark’s 3.8% LfL UK growth against a tough 15% comp gives us confidence on continued delivery as the consumer demand environment improves. The group remains confident that Primark’s return to pre-COVID 11.5% operating margins will be faster than previously thought. We raise estimates slightly and remain 5-6% above consensus. Primark’s store expansion program, margin recovery, and return on investments into capacity expansion in food should combine to deliver double-digit shareholder returns, including 5-6% via dividends and buybacks over the medium term. BUY.
AB Foods reported a solid 1Q’24 with group sales +5.4% yoy at constant FX. Primark achieved +2.1% LfL sales growth against a tough +11% comp, and the group noted increased confidence in the delivery of >10% Primark adjusted operating margin in FY’24E driven by a further improvement in product gross margin. UK Sugar production is expected to be broadly in line with historical periods (c. 1.0m tonned), which is reassuring. Outlook for the full year FY’24E is unchanged. We continue to forecast that the group could beat market consensus expectations for FY’24E driven by stronger than expected profitability at both Primark and Sugar. Earnings beat, significant and growing free cash generation, consistent cash returns to shareholders via buybacks and dividends, and an inexpensive valuation underpin our BUY rating.
Associated British Foods^ (ABF, Buy at 2,268p) - Meaningful progress - further upgrades.
Addendum - Initial Equity Trading Comments - 23 January 2024
P1, 16 weeks to 6th January 2024 In the Foods businesses, overall, Grocery ‘performed well’ with good performances in the Stratas joint venture in edible oils. In Sugar, management believes that sugar production will still be significantly above last year - bringing production more broadly into line with historical production levels. Across Grocery, Sugar, Ingredients and Agriculture sales growth was +1.8% (H2 FY23: 2.5%), +3.8% (H2 FY23: +53.1%), -2.8% (H2 FY23: +38.3%) and -12.1% (H2 FY23: -2.5%), respectively. Primark LfL sales were +2.1% compared to +8% in Q4 last year (FY23 H1: +10%; Q3: +7%; Q4: 8%;). Performance was slow to start with, particularly in cold weather categories - owing to unseasonable weather - but trading is reported to have been ‘strong’ over Christmas, with cold weather categories improving in recent cold temperatures. Management believes it has exited the period with stock levels in a good position and it reports in its outlook statement that gross margins (at Primark) made further progress. By geography UK and Europe LfLs are up +3.8% (UK LfLs FY23 H1: +15%; Q3: +6%; Q4: +7%) and +1.3% (Europe LfLs FY23 H1: +8%; Q3: +7%; Q4: 9%), respectively. Total sales in the US were +45%. UK maintained market share, at 7.1% and up 0.1%ppts versus last year. Performance in Europe was mixed across geographies. At this stage management does not expect any significant disruption to its supply chain from events in the Red Sea Outlook and view Management continues to expect ‘meaningful progress’ in profitability driven by a recovery in the Primark operating margin –management expects Primark operating margin to ‘recover above 10%’ – as well as a marked improvement in British Sugar profitability, and by reduced losses at Vivergo. For reference, consensus expects FY24 PBT to rise 19% YoY to £1,763m. While the Primark top line slowing is a little disappointing, the performance is understandable given mild weather conditions and is congruous with trends reported by other retailers over the period. That the LfL exit rate improved and that further progress has been made with gross margins at Primark, is reassuring. We recently moved to Add (see here). While the valuation/earnings growth profile may not be particularly eye-catching, we concede that sentiment is more likely to be driven by earnings momentum, which is still turning positive, in our view.
We expect ABF to report a solid start to FY’24E and reiterate full year guidance in its 1Q’24E trading update on 23rd January. We expect modest LfL growth at Primark in 1Q’24E due to tough comps and weak Dec’23 footfall and expect ABF to confirm guidance of significant profitability improvement in Sugar. We continue to forecast that the group could beat market consensus expectations for FY’24E driven by stronger than expected profitability at both Primark and Sugar. Earnings beat, significant and growing free cash generation, consistent cash returns to shareholders via buybacks and special dividends, and an inexpensive valuation underpin our BUY rating.
Since we turned BUY in June, a lot has happened: (1) ABF has delivered 11% EPS upgrades (8% from trading; 3% from buybacks); (2) it has announced a further £500m buyback; and (3) it has declared a special div of 12.7p (c.£100m). The capital allocation framework suggests that if leverage (incl. leases) is <1x then the group will consider further cash returns to shareholders. Leverage ratios do indeed fall well below this threshold. The trading outlook has improved, and several margin tailwinds, w/cap release in Primark, strong volume growth in Sugar and lower inflation across the group support increased cash returns.
Estimate changes: AB Foods (ABF.L, Price 2250p - Add - TP: 2379p)
A confident outlook AB Foods reported full year results which were c.2% ahead of expectations and announced a new share buyback and a special dividend. It guided Primark margins to be over 10% based on modest growth expectations which management said had upside risks. All in all, it was a strong set of results reflecting improved confidence in the outlook. We raise our estimates by 4% and our TP to 2,375p. A stronger balance sheet Management followed its first ever share buyback with a new GBP 500m programme over the next 12 months, as well as announcing a special dividend. Capital expenditure will not rise much as some feared, despite Primark''s investment phase into new stores, refurbishment and supply chain automation. Moreover, management guided to further inventory reductions as well as some materially helpful cashflows from lower tax and pension payments. Double-digit margins Management guided FY24 Primark operating margins to be above 10% (FY23: 8.2%) compared with consensus expectations of 9.7%. It did not quantify current trading but it seems likely that sales have caught up after the warm start to the Autumn/Winter season. Indeed, despite its caution about consumer demand, management sees more upside than downside to its guidance for ''modest'' Primark like for like sales growth. Delivering LFL growth consistently remains a key to unlock a higher valuation multiple, in our view. Buyback and higher margins drive 4% EPS increase Factoring in Primark FY24 margins of 10.4% and adding the share buyback drives earnings upgrades of c.4% for FY24 and c.6% for FY25. Our DCF/SOTP derived target price rises to 2,375p. With modest upside to this target we maintain our Neutral rating.
Associated British Foods^ (ABF, Buy at 2,106p) - FY23A - 37% DPS rise incl., a special!
Finals, 52 weeks to 16th September 2023 Group adj. PBT is £1,473m, +9% YoY, a touch ahead of consensus expectations at £1,416m. The beat appears to have been driven by slightly better than expected profits at the Primark and Grocery businesses. Net cash before leasehold liabilities is £895m (consensus: £980m) and the final dividend is 33.1p. An additional £500m buyback programme has been announced, following the conclusion of the previous £500m buyback in October. By division, Full year Primark Total Sales have already been pre-reported and are up 15% YoY (cc) with LfL sales up 9% YoY (Q4: +8%, Q3: +7%; H1: +10%). The UK reported a stronger performance with LfLs up 11% (H1: +15%) versus Europe up 8% (H1: +8%), as previously reported. Primark full year operating profits were therefore £735m, -3% YoY (cc), versus consensus at £725m, implying H2 operating margins were 8% - ahead of pre-close guidance for H2 margins to be ‘slightly below 8%’. Elsewhere, Sugar profits were £169m, +4% YoY (versus consensus £168m) with Sugar sales and profit well ahead despite a more challenging British Sugar crop. Grocery profits were £448m, +12% YoY (versus consensus £435m). Ingredients profits were £214m, +28% YoY (versus consensus £209m). Agriculture full year profits were £41m, -15% YoY (versus consensus £44m). Free cash flow was £269m, with higher profit offset by higher capital investment and reduced working capital outflow. Outlook and view At Primark, management expects further sales growth from 1m sq ft of additional selling space as well as modest LfL growth. It also continues to expect a ‘substantial’ recovery in gross margin owing to lower material costs, a weaker US dollar and lower freight costs, such that adj. operating profit margin is expected ‘recover above 10%’ in FY24 versus consensus at 9.7%. In the food businesses, management expects stability across Grocery and continues to expect a ‘substantial improvement’ in Sugar business profitability, driven by a marked improvement in the performance of British Sugar and an anticipated better UK sugar beet crop. For reference, consensus expects FY24 PBT to rise 17% YoY to £1,661m. We recently moved to Add (see here). While the valuation/earnings growth profile may not be particularly eye-catching, we concede sentiment is more likely to be driven by earnings momentum - which is turning increasingly positive.
Searching for value Since Cheap thrills in June, a number of key events have taken place, and we return with fresh analysis on the European value retailers. First, some of the industry''s margin tailwinds have become clearer, and are now in consensus expectations for Primark. Second, major industry capacity withdrawal has taken place, benefiting BandM. Third, management change at Pepco has thrown its strategy into question. We revisit our theses, upgrading BandM (+) and downgrading AB Foods (=). Margin tailwinds We expect significant margin tailwinds in 2024, as set out in Setting the prices for the Fall, driven by improved supply chain conditions. Primark has already surprised investors by suggesting that it should be able to return to 10%+ margins in 2024, earlier than expected. Investors still worry that the variety discount retailers, like Action, BandM, and Pepco, could pass these gains on to consumers, fuelling deflation and lower sales growth. However, if this happened it would likely drive greater price advantage and volume growth. Cash margin matters most, and we think this continues to grow. Capacity withdrawal BandM shares have not reacted to the withdrawal of private competitor Wilko by as much as we expected. The portfolio of 400 stores has so far been carved up (up to 51 to BandM, 71 to Poundland) and c.280 likely to close. This fills BandM''s new store pipeline, enabling a faster store roll-out, and should support LFLs through share capture. We analyse drive-times of the store portfolios and present scenario analysis for this capacity withdrawal. Our BandM FY Mar-25 EPS rises by c.8%. Management change and what''s in the price The departure of Pepco''s CEO throws its strategy and our equity case into doubt. However, its capital markets event on 17-18 October should improve visibility. We stick with our thesis, albeit remove Pepco as a top pick and cut our TP to PLN36. We see an opportunity in BandM shares, which we upgrade to Outperform, whereas...
ABF BME PCO
Primark – recovered, but is there further to go? Sales densities have finally returned to pre-pandemic levels. We estimate that sales densities in the UK will be c. 7% above pre-pandemic levels in H2 FY23E (see Figure 1 overleaf). Can the momentum continue? Management attributes the improvement to digital development as well as breaking into new higher price point categories - specifically within the womenswear category - where competition has exited. Primark margins set to rise above 10%: With sales growth being predominately driven by price action, falling supplier, freight and energy costs (and likely easing dollar pressures in H2 next year) means management expects that margins should start to recover and could rise ‘north of 10%’ next year. We estimate that, should margins return to 10%, Primak’s depressed profit densities would return to pre-pandemic levels (see Figure 2). With reduced competition levels - following the closure of Debenhams and Top Shop stores - management believes margins at >10% is sustainable. Were we to be critical, we would highlight that recovery at Primark has been slow versus peers, despite a relatively favourable trading environment with consumers trading down. That said, market share has been stable despite the step-up in online participation since the pandemic. In the meantime, the European performance remains wanting - we estimate sales densities here are still some 9% below pre-pandemic levels, posing some questions about the strength of the proposition. However, weakness in Europe appears to be geography-specific. Therefore, actions taken by management in Germany should help to remedy underperformance. In the meantime, management now believes that, with production recovering in the Sugar business, coupled with elevated sugar prices, margins here could feasibly now return to 2017 levels of 10% (FY23E: 6.9%).
FY’23 operating profit will be slightly better than previously expected driven by better-than-expected performance in the Sugar business. Primark’s LfLs in 4Q’23 have remained solid at +8% (+7% in 3Q’23) and full year margins are expected to be c.8%, slightly below prior guidance of around 8.3%. The group has provided a positive outlook for FY’24E with Primark adj operating profit margin expected to recover strongly and Sugar profitability to improve substantially in FY’24E underpinning consensus expectation of 11.4% adj. EPS growth in FY’24E. The shares trade on 12.9x FY’24E PE multiple and 7.0x FY’24E EV/EBITDA multiple on consensus estimates, a c.30% discount to the 10-year average.
Associated British Foods^ (ABF, Buy at 2,001p) - FY23 trading statement – slight EBIT raise, strong signs for FY24
Pre-close trading 52 weeks to 16th September Primark total sales are +15% (cc) (Q3: +13% (cc); H1: +16% YoY (cc)) with sales at £9.0bn. FY consensus expects Primark FY23 sales to be £9,010m, +17%. Sales growth has been driven by price increases and strongly performing new stores. Therefore, full year LfLs are expected to be +9% with H2 LfLs at +7% (Q3: +7%; H1: +10%). Specifically, UK / Europe Q4 LfLs are +7% (Q3: +6%; H1: +15%) / +9% (Q3: +7%; H1: +8%) respectively. Unseasonable weather impacted trading in July and August. Pleasingly, the UK market increased to 6.4% from 6.2% (for the 12 weeks to 20 August). Elsewhere, US sales are expected to be up 45% in Q4 driven by new store openings. However, adj. operating profit margin (at Primark) is now expected to be weaker in H2 due to higher-than-expected stock loss from stores across the estate and a modest amount of German restructuring costs. Management therefore now expects H2 adj. operating profit margin to be ‘slightly below 8%’ (previously ‘above 8%’) with full year operating margin at 8%. In the Food business, adj. operating profit is now expected to be ‘strongly ahead’ of the previous financial year. Q4 trading in Sugar has been ‘slightly better’ (vs Q3: +51% (cc); H1: +27% (cc)) and management now expects sugar adj. operating profit to be ‘modestly above’ last year. In Grocery, trading as been ‘slightly better’ than expected (vs Q3: +13% (cc); H1: +10% (cc)) and management now expects full year adj. operating profit to be ‘significantly higher’ than last year. In Ingredients, trading has been ‘well ahead’ (vs Q3: +10% (cc); H1: +27% (cc)) and in agriculture the business recovered in H2 (vs Q3: +4% (cc); H1: +15%); but management expects adj. operating profit to be modestly below last year. Outlook and view Management still expect Sugar to make a ‘substantial improvement in profitability’ driven by a marked improvement in the performance of British Sugar and an anticipated better UK sugar beet crop. At Primark, management continues to expect ‘a substantial’ recovery in gross margin owing to lower material costs, a weaker US dollar and lower freight costs, all of which have improved in recent weeks. Management therefore expect Primark adj. operating profit margin to recover strongly in the next financial year. Whilst earnings momentum is improving here, the shares trade on 13.3x FY24E PE thus we continue to see better value elsewhere within the sector.
Forget the Champs-Elysees, leave behind the designer gear and dig out your loose change to join us for the thrill of a summer sale in value retail. And if you''re worried ''cheap'' equals ''low quality'', think again: our dive into the financials and growth plans comes up with sheer, timeless class. We''ve been banging the drum for value retail for a while. Now, with the key players in great shape, Europe still underpenetrated, and no signs of easing in the cost-of-living squeeze, there''s no better time to hitch a ride on this disruptive megatrend. In our coverage of four, we pick out three stars: king of ROCE 3i/Action, value play AB Foods, and engine of growth Pepco. We downgrade cash compounder BandM to Neutral, but only because its quality is no secret.
ABF III BME PCO
ABF has passed through the worst of cost inflationary pressures and various factors are aligning that should drive a period of significant earnings growth. These will entail margin recovery at Primark, Grocery and Sugar with continued strong performance in Ingredients. We upgrade to BUY (from HOLD) with a 2,400p TP (from 1,900p) with the upside being driven by earnings growth (we forecast 12% adj. EPS CAGR over FY’23-26E). Positive earnings momentum should drive a rerating providing greater upside than our TP may suggest for now. On a SOTP basis we believe Primark is underappreciated by the market with an implied P/E valuation discount of c. 30% to its peers
Associated British Foods^ (ABF, Buy at 1,935p) - EBIT moderately ahead -
Q3 12 weeks to 17th May Group revenue is +16% YoY (cc) (H1: +17% YoY (cc)). Sales growth in the Food businesses was +18% (H1: +23%) which reflected price actions to recover input cost inflation. Sugar, Grocery, Agriculture, and Ingredients sales growth was +51% (cc) (H1: +27% (cc)); 13% (cc) (H1: +10% (cc)); +4% (cc) (H1: +15%); +10% (cc) (H1: +27%), respectively. In Sugar, trading has continued to be strong across its key African markets but, as previously announced, British Sugar has had to secure alternative sources of supply, which is expected to impact profits in H2 such that profit guidance issued at the interims was for full year profit to be “down” owing to increased costs. Primark total sales are +13% (cc) (H1: total sales: +16% YoY (cc)). As expected, LfLs have moderated to +7% (H1: +10%), with UK and Europe LfLs at +6% (H1: +15%) and +7% (H1: 8%), respectively. Pre-pandemic comparatives were slightly tougher in the UK but neutral for the Primark business as a whole. As well as seasonal clothing and accessories, sales in health and beauty products were particularly strong. There is no commentary on the performance of US sales; however, the new ‘much-improved’ Primark website has been rolled out in Germany, Spain, Italy, and in the US in the period, and the store expansion plan is on track. View and outlook Based on current trading, management now expects that full year Group adj. operating profit will be “moderately ahead” of last year, versus previous expectations that it would be “broadly in line”. Adj. EPS will also now benefit from a lower effective tax rate, expected in H2. Whilst earnings momentum is improving here, the shares trade on 12.9x FY24E PE thus we continue to see better value elsewhere within the sector.
Associated British Foods^ (ABF, BUY, 1950p) - Q3 trading statement preview
Initial Equity Trading Comments - 6 June 2023
ABF FA/ EVPL PAG WHR NRR GEN AUTO AO/ NBRNF
Associated British Foods^ (ABF, Buy at 1,842p) - Acquisition of National Milk Records
Associated British Foods^ (ABF, Buy at 2,070p) - Interim FY23 results, growing Primark confidence
1H’23 results are in line with guidance, with group sales up 21% yoy and adj. operating profits down -3% yoy. Primark sales grew +10% LfL (UK +14%, C. Europe +8%) but profitability declined to 8.3% (vs. 11.7% in 1H’22) driven by gross margin pressure from a weaker £ and higher freight rates, as well as higher labour and energy costs. FY’23E guidance has been reiterated with adj. operating profit and adj. EPS expected to be in line with last year. Primark FY’23E adj. operating margin is expected to be around 1H’23 levels of 8.3%. The Primark Click+Collect trial is progressing well and the group is rolling it out across London stores. German restructuring has been detailed with planned closure of 6 stores and space reduction in a few others. The medium-term growth and margin story at Primark remains intact and recent cost pressures from GBP devaluation and freight costs will reversing in the near future. The consumer backdrop is still tough though which underpins our HOLD rating. The shares trade on 14.8x forward PE multiple and 7.4x EV/EBITDA, a c. 25% discount to the 10-year average multiples.
Interims, 24 weeks to 4th March 2023 Group Adj. PBT is £667m, flat YoY, and broadly in line with consensus expectations of £676m following a strong performance in the Food business, +13% (cc) YoY, offset by a weaker performance in Primark. Net cash was £586m, in line with guidance at the interims, following a £895m cash outflow during the half - owing to higher inventory levels in the Sugar and Primark businesses and the initiation of the £500m buyback. Inventory levels are expected to fall in H2. Primark - sales have already been pre-reported with total sales +16% (cc) YoY and LfL sales at +10% YoY (LfL YoY UK: +15%, Europe: +8%; Total US: +11%). Primark operating profits are £351m, -16% (cc) YoY with operating margins at 8.3% - in line with guidance. On this basis, going forward management continues to expect LfL sales growth to moderate in H2 and for operating margins to remain “above 8%” (consensus: 8%) implying management expect a similar H2 operating margin performance. Pleasingly, management reports that it has seen a positive reaction to its spring and summer ranges and market share in the UK has increased from 6.2% to 6.5%. However, sales densities in Germany remain too low, thus management is implementing a restructuring programme and is electing to close a number of stores. Elsewhere, the early signs in digital development are encouraging and management believes that the new launch of the website has contributed to LfL growth in the relevant markets. For the remaining businesses Sugar profits were £86m, +5% (cc) YoY (versus consensus £90m) with performance positively impacted by higher selling prices albeit offset by higher energy costs. Grocery profits were £173m, -10% (cc) YoY (versus consensus £172m) where higher prices drove 10% YoY sales growth helping to recover cost inflation. Ingredients profits were £102m, +48% (cc) YoY (versus consensus £83m). Agriculture profits were £12m, +20% (cc) YoY (versus consensus £15m). The interim dividend is 14.2p (LY: 13.8p). Outlook & valuation Management continues to expect that full year adj. operating profit and adj. EPS will be “broadly in line” with last year with Grocery profits now expected to be “ahead” (previously “in line”). However, it now expects Sugar profits for the full year to be “down” (previously “in line). As previously flagged, H2 sugar profits will be impacted by increased costs - as a consequence of the much lower UK beet crop. Meanwhile, full year Ingredients profits continue to be expected to be “significantly ahead” of prior year profits. As mentioned above, management also continues to expect Primark operating margins to be “above 8%”. The shares trade on 13.8x FY24E PE; we continue to see better value elsewhere.
Associated British Foods^ (ABF, Buy, 2046p) - Multiple potential emerging tailwinds
Sweet Primark performance offset by Sugar miss Primark sales in the 16 weeks to 7 January were 8% ahead of our expectations. Margins were unquantified but ahead of management''s expectations. Sales momentum has continued in more recent weeks. Disappointingly, Sugar was below expectations, with low production volumes due to the hot summer being compounded by frost damage in December. Hence our group forecasts are broadly unchanged. However, Primark''s encouraging performance and the recent increase in peer multiples drive a higher target price. We maintain our Outperform rating. A Christmas story: all about stores Like its multichannel peers, Primark delivered strong store sales over peak. Sales during the 16 week ''Q1'' were GBP 3.1bn, 8% ahead of our estimates. Strong like for like growth in UK (c.+15% yoy) implies LFLs c.+4% versus 2019. Europe ex-UK LFLs of +8% yoy implies LFLs c.-6% versus 2019, sharply improved compared with -16% in Q4 22. However, we have left our profit forecasts largely unchanged (H1 GBP 395m, FY GBP 674m), reflecting uncertainty about whether these trends can be extrapolated, and reflecting the range of margin outcomes as pressures remain. Frosted sugar Excluding Sugar, the aggregate Food divisions were ahead of expectations, with Ingredients guidance raised. However, British Sugar only expects to produce 0.74m tonnes in the 2022/3 campaign, down from 0.9m guidance and 1.03m the prior year. The lower guidance reflects the damage done by frost (and rapid thaw) to beet still in the ground. Click to buy Stepping away from the Sugar miss, Primark''s sales recovery improves, its click and collect trial is making encouraging progress and store expansion is also driving growth. We upgraded AB Foods to Outperform at the start of January (What''s in store) and our largely unchanged EPS forecasts remain c.5% higher than consensus for FY23 and c.10% for FY24. Our DCF- and SoTP-derived target price is 2,000p, raised on higher peer...
AB Foods reported a strong 1Q’23 with group sales +20% yoy and +22% vs. pre-pandemic. Primark LfLs were +11% LfL, ahead of the group’s expectations (but probably in line with market expectations), with a very strong Christmas. Food businesses sales were +17% on constant FX driven by price actions to recover cost inflation and higher sugar prices. Group full year guidance has been maintained with lower Sugar and better ingredients performance than previously expected. We expect consensus numbers to nudge slightly higher today (we upgrade adj. EPS 1-3%). The medium-term growth and margin story at Primark remains intact but there are numerous near-term cost pressures and consumer backdrop is tough. The shares trade on 14.5x forward PE multiple and 7x EV/EBITDA, a c. 30% discount to the 10-year average multiple but we see limited near-term catalysts. Reiterate HOLD, TP 1,900p (from 1,550p) driven by higher earnings and higher peer multiples for our SOTP valuation.
P1, 16 weeks to 7th January 2023 Pricing action taken across the Food businesses, coupled with a stronger dollar, has led to an acceleration in sales growth. Across Grocery, Sugar, Ingredients and Agriculture, sale growth rates were: 14% (H2 FY22: 4.1%), 31% (H2 FY22: 39.3%), 36% (H2 FY22: 35.2%) and 19% (H2 FY22: 15.4%) respectively. However, management expect Sugar volumes this year to be impacted by adverse weather. Primark: Sales were ahead of expectations with LfLs up 11%, compared to +6% in Q4 last year. As expected, price hikes have buoyed sales, but clearly Primark has benefitted from improved footfall (which was disrupted by Omicron last year) meaning LfL sales have been supported by higher unit volumes as well. Pleasingly, the UK experienced an improvement in market share too, now at 7%, up from 6.5% last year and close to record levels since stores reopened in June 2021. By way of reference, the pre-pandemic comparative was 600bps tougher. By geography, LfLs were: UK:+c.15% (versus +13% at Q4 FY22); EU: +8% (versus +1% at Q4 FY22), US: +4% (total sales). While margins continue to be impacted by higher energy and commodity costs coupled with weaker sterling, adj. operating profit margin in the period was better than expected as a consequence of the sales performance - for reference, FY23 adj. operating profit margin is expected to be lower than c. 8%. The pipeline for new space has not changed since the Finals, with management expecting to open 1m sq ft for this financial year, having opened 0.4m sq ft to date. Management continues to focus on accelerating the roll out of stores in the US, France, Italy and Iberia, in line with its ambition to grow the store estate to some 530 stores. Outlook & view For FY23, management continues to expect Food businesses sales to be ahead of FY22, but with a lower margin. However, it now expects profits at AB Sugar to be broadly in line with last year (pre-statement INVe: +18%YoY) as a result of a much-reduced UK sugar crop. Therefore, despite better trading at Primark, overall guidance is unchanged with management expecting “significant growth in sales, and adj. operating profit and adj. earnings per share to be lower than the previous financial year”. While we are pleased to see UK market share recovering as well as a recovery in the European business, the miss in Sugar is disappointing. Given the valuation, 13.8x NTM PE, we see better value elsewhere in the sector.
Lessons from the GFC: During the GFC, share prices in the retail sector declined by 56% from peak to nadir over a period of 16 months. Driving this was a decline in NTM EPS, which declined 25% (from peak to nadir) over ten months. Yet approximately halfway into the downgrade cycle, the Retail sector rallied strongly and re-rated as much as 5x NTM PE as the downgrades started to lessen. If history repeats itself, we may be approaching the nadir: In this downturn, share prices in the retail sector have declined by 48% over an average period of 13 months and have seen NTM EPS decline by 21% over ten months. The downgrade cycle started even earlier for pure-play onliners and has been deeper. On this basis, the sector could be close to the end of its downgrade cycle, in which case a re-rating might be imminent. But this recession could be different? So far, the majority of downgrades have largely been driven by margin pressures owing to higher freight, labour and product input costs, while pressures from elevated energy costs and FX headwinds are still to come. We believe the current wave of downgrades largely reflects anticipated margin pressures. We believe “demand destruction” poses further downgrade risk in the short term: UK consumers are facing unprecedented budget constraints, but the degree to which this is factored into valuations is hard to gauge – top-line growth forecasts still appear stretched, with the average top-line growth across our universe expected to be +4% in 2023 (for established players). Short term, elevated inventory levels may cause further shorter-term gyrations around Christmas trading, particularly for fashion-led online retailers. However, we do not anticipate a discounting blood bath, as seen pre-covid. There are plenty of valuation anomalies across our universe and share prices are already starting to discount a challenging 2023. Retail is usually one of the first sectors to underperform going into a downturn, and one of the first to recover. Given where we are in this downturn, we believe now is time for investors to consider taking up their positions to establish exposure. The best way to outperform in Retail, in our view, is to select stocks that are biased towards roll-out stories. They these are less reliant on the underlying health of the consumer. We would highlight Dr Martens, Greggs, JD Sports, WH Smith and Watches of Switzerland. Our top-two smaller-cap picks are Halfords and Wickes, where we believe the transformations of their business models have not been appreciated by the market. We expect both to emerge much stronger, with new growth opportunities to go after.
ABF ASC BME DEBS CARD CURY DOCS DNLM GRG HFD JD/ KGF MKS WINE NXT PETS SDG SCS SMWH WRKS WOSG WIX SDRYN
AGM update Outlook remains unchanged, with management expecting “further significant input cost inflation” although it comments that volatility of input costs “has diminished”. At this early stage, Primark trading to date has been “encouraging” and management are on track to open 27 new stores this year. Management also continues to expect the aggregate profit of the Food businesses to be ahead of last year, in line with expectations As such, management continue to expect “significant growth in sales for the Group, and adjusted operating profit and adjusted earnings per share to be lower than the previous financial year.”. View We remain underwhelmed by market share progress at Primark UK (since the pandemic) and worry that new entry price point online players may be taking share. In the meantime, the European business is likely to remain a drag on earnings. While this is a reassuring trading update, we have some concerns that online players are currently holding high levels of inventory, leading to a likely promotional environment over the peak season. While the valuation is by no means demanding - on 13x FY23E PE - earnings momentum has stalled recently and is unlikely to re-accelerate in the foreseeable future, in our view.
UK Retail sales accelerated in November, with total sales up 4.2% (up 4.1% on a LFL basis). There was still a decline in volume terms as sales growth remains below inflation, but consumers have come out and started spending ahead of Christmas. Growth was helped by Black Friday events with the sales period starting a week earlier versus last year. In particular, this drove the fashion and homewares categories which saw the biggest discounts, rather than the more traditional computing and electronics. Clothing spend also responded to periods of cold weather. Food sales continue to be driven by accelerating inflation. 3-month average total food sales were up 5.8%, the highest level since June 2009, with LFL sales up 5.5%. The rate of volume decline did slow month-on-month as consumers started to buy seasonal goods. Non-food sales returned to growth in October, although 3-month average sales were flat, with LFLs down 0.4%. When the change to cooler weather finally came, heavier clothing items and outerwear responded, with demand for coats and boots taking off. Indoor electrical goods, such as heaters and air friers, saw the strongest sales increase. Footwear led the category growth table, followed by furniture, food, household appliances, health & beauty, and house textiles. Furniture delivered an impressive performance given a tough comp last year and household appliances recorded its strongest performance so far this year. Beauty products continued to drive Health & Beauty sales, with strong demand for fragrance, make-up, skincare and wellness products. Household textile sales accelerated from the broadly flat position recorded in October, helped by high-tog duvets and blankets to keep warm. Clothing sales were down month-on-month, but sales accelerated through the month, peaking in the third week, helped by Black Friday promotions. Womenswear outperformed menswear, with occasion wear in demand. Childrenswear remained the weakest category. Online clothing continued to decline, though is still ahead of pre-pandemic levels. In terms of declining categories, home accessories spend has now declined in eight of the last nine months. Toys & baby equipment is still struggling, as gaming remains popular and trading down is happening in baby equipment. Computing sales are still in decline and continue to experience a COVID-related hangover. TV sales were not helped by the start of the soccer World Cup.
ABF ASC BME DEBS CARD CURY DOCS DNLM GRG HFD JD/ KGF MKS WINE NXT SDG SCS SMWH WRKS WOSG WIX SDRYN
Energy remains the biggest cost unknown in 2023 with a HM Treasury-led review of the Energy Bill Relief Scheme (EBRS) due to be published by 31 December 2022. While the government recognises that some businesses may continue to require support beyond March 2023, the overall scale of support the government can offer will be significantly lower. The impact on retailers will vary depending on what they are paying now and hedging policies. A National Living Wage (aged 23+) increase of 9.7% to £10.42 an hour from 1 April 2023 was confirmed by the Chancellor. The National Minimum Wage (NMW) and apprentice rate will increase by between 9.7% and 10.9% depending on age. This scale of increase was largely anticipated by retailers, which are NLW or NMW+ payers typically. Business rates changes may result in a decline in bills YoY, though the scale will vary by individual retailer as it depends on the valuation of the properties from which they operate. Business rate bills in England will be updated from April 2023 to reflect changes in property values since the last revaluation in 2017. Typically, property valuations have fallen since 2017, so this should result in lower bills generally. The multiplier (the amount by which the bill usually goes up annually) have been frozen for another year (it is usually based on September’s CPI, which was 10.1%). The other change is that transitional relief has been reformed with the downward cap abolished. Historically, the application of transitional relief meant the retailer did not get the full impact/benefit of any upward/downward revaluation immediately; it was phased over a number of years. So, if the property valuation had come down, the business would have to over-pay for several years. No online tax introduced. This has been under discussion for a while as a way of trying to level the playing field between physical retailers and online players (which typically pay very little in business rates). In summary, 2023 will still be a tough year for the industry, although, generally, sector forecasts and valuation are starting to discount this, in our view. Consumers still face a huge cost-of-living crisis which is expected to continue to weigh on spending, and result in them having to make hard choices over what to spend their disposable income on.
CEO Video - Sylvania Platinum, ABF, Persimmon, Atlantic Lithium, FirstGroup, Tracsis, SourceBio, Mining LOWdown, Market Highlights
ABF PSN FGP ALLIF TRCS SBI TW/ JDW CSH RECI GYM ESKNF
Solid finish to FY22 AB Foods had already made a pre-close update so there weren''t many surprises in FY22 results. However, the GBP 500m/c.5% share buyback was news. A robust net cash and pension surplus position mean that for the first time during CFO John Bason''s 24-year reign over the numbers, which comes to an end in Spring 2023, the company will buy back its shares. Management also sounded more confident about 2023, having seen a robust start to the financial year. We raise FY23 Adj EPS by 8% but stick with a selective approach in the sector and maintain our Neutral rating. Increased confidence in the year ahead Primark trading in the new year has started well and its inventories are clean. 90% of its FY23 US dollar purchases are now hedged, which limits the volatility. We raise our Primark expectations to profit GBP 663m, 7.7% margin. Sugar profits should reach their highest level since EU deregulation in 2017, underpinned by high sugar prices. Grocery faces even more inflationary cost headwinds than last year, but having held profits broadly flat in FY22 we think the risks are controllable. The year ahead will answer some major questions 2023 is a significant year for Primark. Having shown that its sales can recover from Covid in UKandI and US, it still has this to prove in Continental Europe, including solving its problems in Germany. Its click and collect trial will provide evidence about how far its omnichannel journey can go, and increasing its US store base from 10 to 23 in a year will shed light on how realistic its 2026 ambition of 60 is. A Christmas jumper? In the near term the focus is likely to remain on Primark, with trading updates due in December and January. We expect mid-single digit like for like growth, supported by price rises. However, we remain on the sidelines, preferring Inditex and Next in the apparel sub-sector, whose omnichannel models offer more upside, in our view, and whose robust financials also protect on...
FY’22 results are slightly ahead of consensus expectations and FY’23E guidance reiterated. With leverage at 0.8x consistently below the 1.0x comfort level, the company has announced £500m share buyback (c. 4.7% of its issued share capital). There is also a 3.1% dividend yield which combined with the buyback total 7.8% returns to shareholders. On the negative, ABF is taking a £206m impairment charge to its German business and is also reviewing its total space in that market. Outlook for FY’23E is unchanged, with significant sales growth driven by price increases but adjusted operating profit and adjusted EPS to decline yoy, driven by lower profits at Primark. Shares look attractive trading on only 4.3x forward EV/EBITDA and 12.3x PE, but with Primark sales in Continental Europe still well below pre-pandemic levels, along with rising cost pressures we see continued pressures on margins with limited near-term catalysts. Remain HOLD with reduced 1550p TP (from 1700p) reflecting our lowered estimates.
Issuer Sponsored HILTON FOOD GROUP+ (HFG, House Stock, 634p) – An ongoing challenge in UK Seafood I(X) NET ZERO+ (IX., House Stock at 19p) – WasteFuel partnership in the Middle East MUSICMAGPIE+ (MMAG, House Stock, 12.3p) – Completion of Asda SMARTDrop roll-out UNION JACK OIL+ (UJO, 35p, House Stock) – Very encouraging operational update. FTSE 250 OXFORD INSTRUMENTS^ (OXIG, Buy, 1978p) – Strong HY23A; FY23F expectations unchanged. Main Market ASSOCIATED BRITISH FOODS^ (ABF, Buy at 1436p) FY22 results & FY23 outlook - buyback announced, no change to forecasts. WAREHOUSE REIT^ (WHR, Buy at 123p) – Interim results: good rental growth but portfolio valuation falling AIM MARKS ELECTRICAL GROUP^ (MRK, NR, CP at 71p) – Some bright spots but downside risk ZOO DIGITAL^ (ZOO, NR, CNP, 167p) – Strong H1 performance Cross Sector BRC-KPMG RSM – October 2022: Price driven revenues ahead of peak, non-food value negative in October UK SUPERMARKETS – Christmas advertisement of 2022, and the winner is...???
ABF HFG MRK OXIG UJO WHR ZOO IXNZF 6R5
Outerwear in Cardiff would have been most helpful for the Welsh defence as it crumbled in the face of an All-Black assault. Thankfully, for the crowd, the roof at the Millennium Stadium of old was closed. However, outside the stadium it was raining cats & dogs and so said outerwear was absolutely relevant and so maybe a strong weekend for the sub-category. In Cardiff’s city centre Marks & Spencer+ (‘M&S’), which reports H1 FY23 results this week (Wednesday 9th), the footfall was busy on Saturday, partly to keep dry, but there were also long queues at the check outs, perhaps with early festive buying to the fore, as well as at the café.
ABF MKS ASC
Associated British Foods ('ABF'), the FTSE-100 listed British consumer group, reports FY22 results on Tuesday 8 November. We look for a PTP of £1,351m (EPS, 128.7p). To us, the future trajectory of the ABF share price will not be what is in the rear-view mirror of these results as opposed to the Capital Allocation Framework ('CAF') and the outlook statement. We have a BUY stance on ABF's equity, trading on an FY23 PER of 11.9x, an EV/sales multiple of 0.6x and an EV/EBITDA multiple of 5.7x; we expect still substantial cash balances in September 2023. BUY.
Associated British Foods (‘ABF’) delivered lower guidance for FY23F, noting its September year-end, something we sense many other consumer firms will be repeating in forthcoming updates as weaker aggregate demand with inflation and rising base rates, operating cost inflation including energy and, currency headwinds bite. Whilst disappointing, we see a business with relevant Food divisions where food security and strong brands carry growing implicit value whilst Primark remains a business that desires growth, planning a c32% increase in its store platform to FY26. The stock has underperformed the FTSE-All Share by 31% in the past twelve months, a poor return, but we continue to believe that a firm with strong values, a healthy long-term approach, £1.5bn+ cash on the balance sheet, a 3%+ dividend yield and a 5.6x FY23F EV/EBITDA rating is undervalued. Bruised, we keep our BUY stance.
Primark’s top line performance will likely be weighed down by Europe, with sales densities in Europe still way short of pre-pandemic levels. With few signs that the ongoing energy crisis in Europe is abating, we have little faith that performance there is about to turn around any time soon. But UK’s recovery is encouraging with the gap (in sales densities relative to pre-pandemic levels) now narrowing. Pleasingly, management has highlighted that it has not ceded market share since the pandemic despite lacking online presence. The roll out of a Click & Collect service could be a significant development and will no doubt, in our view, remedy unfulfilled demand – thereby generating incremental sales. But new headwinds are materialising from elevated energy costs - now c.2.5% of Primark’s sales versus 0.5% pre-crisis - while the recent dollar appreciation threatens to weigh on margins for some time. We estimate that 75% of FY23’s dollar requirements were bought forward at levels around $1.22 implying that FX headwinds could endure into FY24, if current spot rates do not recover. While management would not rule out margins returning to prior levels (12% to 13%), energy costs would still need to fall back down to pre-crisis levels for this scenario to emerge. Food business: Following successful pricing action this year, we expect profits next year to continue to be driven by the sugar business, with higher World sugar prices benefitting top line growth. Forecasts: Despite assuming higher sales growth going forward – owing to pricing action - we bring our PBT forecasts closer in line with consensus for this year, downgrading them by 8%, and by 19.5%/14% in FY23E/FY24E – predominately reflecting lower operating margins in the Primark business. Our TP declines to 1445p on the back of said changes (lower assumed outer year margins), and an increased WACC reflecting higher market risk and inflation.
Pre-close trading for the 52 weeks ending 17th September 2022 Group outlook for the FY22 year unchanged, with the Food business seeing operating profit in line with exceptions. At Primark, total sales are expected to be up c.40%, reflecting to store closures last year. Primark LfLs sales are 9% below pre-Covid levels, but are in line with Q3. Pleasingly, Q4 UK LfLs are now close to pre-Covid levels having been -4% (below pre-Covid levels) at Q3 and -8%, at H1. However, the expected recovery in European LfL sales has not emerged and LfLs were weaker than management expected in Q4 at -18% (below pre-Covid levels) versus -15% at Q3. Here, footfall failed to improve and management believes there have been recent signs of customers being more cautious. As such, Primark’s operating margin is now expected to be 9.6% for the full year (previously 10%), implying H2 operating margins of 8.6% (versus c. 11.7% in H1). Outlook for FY23 Food profits are expected to be ahead of this year (pre-statement consensus expects 6% YoY profit growth) with further significant input cost inflation offset by pricing action. Sugar profits are expected to be well ahead. On Primark, management now expects the operating profit margin to be lower in than H2 FY22 (at 8.6%) owing to significant market volatility affecting costs and the strengthening of the US dollar at the end of this quarter as well as much higher energy costs. Pre-statement consensus forecasts were expecting operating margins to be 9% in FY23. As such, while the Group now expects significant growth in sales – driven by new space and pricing – it now expects operating profits to be lower in FY23 than consensus expectations of 5% profit growth. Our View Recent weakness in the share price appears to have factored much of the impact of new headwinds reported today, and we are pleased to hear that the recent Click and Collect trial is on track for UK regional launch in the run-up to Christmas - which could be very significant. Whilst the valuation, on 9.6x FY23E PE on our pre-existing forecasts, looks undemanding, the ongoing lack of recovery in Europe is a concern, and there is no visibility as to when current headwinds may abate.
UK Retail sales slowed in August though remained in growth, up 1% on a total basis (July +2.3%) or +0.5% LFL (July +1.6%), as consumers reacted to the ever-increasing cost-of-living and inflation by reining-in spending. Retail price inflation is lower than 10%+ general inflation. A better read on underlying consumer demand is likely in September, with August’s demand impacted by the heatwave, which drove growth of associated categories such as suntan cream, health & beauty (the strongest performing category in August), barbeque food and drinks, and more people traveling abroad this year. Food led the way driven by inflation, with volumes again down, according to the BRC. 3-month average total sales were up 3.8%, with LFL +3.3%. Food inflation accelerated to 9% in August, according to the NielsenIQ shop price index, from 7% in July. Trading down continues, with shoppers focusing more on value lines, private label and discounts. Non-food sales suffered as discretionary spending continues to be squeezed. Over the 3 months to August, non-food sales declined by 2% on a total basis with LFL sales down 2.6%. Channel shift to in-store continues within non-food. Online sales fell 6.1% in August with in-store non-food sales growing on average by 1.4% over the last three months. Online penetration was 38.5% in August versus a 12-month average of 40.8%. Fashion again outperformed homewares, though the demand started to fall away. The wedding season is coming to an end and back-to school was delayed. The significant drop back in clothing sales, though, could be an early indicator that the consumer is cutting down on non-essential shopping. Sales of knitwear were said to be unseasonably high and footwear sales were down on pre-pandemic levels. White goods and homewares were hardest hit. Homewares, house textiles and furniture sales were down on pre-pandemic levels. Demand for sofas, beds and living room furniture as well as bath and bed linens continued to weaken. Within household appliances, people ae looking for energy-saving items with high demand reported for air-friers. Computing remained in decline, despite August usually seeing a pre university pick up. Electricals & electronics, such as TVs and audio, also saw lacklustre demand. Elsewhere, the good weather for most of the month boosted sales of outdoor toys, though the toys and baby equipment category has now been in decline for 22 months. Electronics and gaming continued to perform poorly despite stock levels ahead of last year.
Total sales decreased by 1% in June compared to 3-month average growth of 0.8% and 12-month average growth of 3%. On a LFL basis, sales decreased by 1.3%. The mid-month rail strike had little impact on overall sales, though trade did shift from inner cities to local shops. Non-food suffered the most, with the 3-month average falling for the first time since February last year. Over the 3 months to June, non-food sales declined by 3.3% on a total basis with LFL sales down 4.2%. Total food sales over the last 3 months increased by 2.2% with LFL sales up 1.6%, helped by the Jubilee weekend celebrations at the beginning of the month. Food sales grew for the first time since February. Within non-food channels, in-store sales increased by 2.2% with LFL sales up 0.6% on a total basis. Online Non-Food sales decreased by 9.1% in June, an improvement on the 3-month average decline of 10.3%. The Non-Food online penetration rate decreased from 43.3% in June 2021 to 39.4% this June. Evidence of the squeeze on household spending is clear from the trends, with necessities the focus. Worst hit areas are discretionary purchases especially white goods and homewares. Home accessories and home textiles were down again and recorded a decline versus 2019. Furniture sales continue to decline YoY, though June’s decline was less steep than the rate seen in April and May. Consumers are trading down to cheaper brands and price points within food and non-food, according to the BRC. Not all bad news in non-food categories as clothing continues to perform well thanks to formal wear benefiting from occasions such as weddings and summer holidays helping casual wear. Sportswear is also reported to have performed well. There was weakening demand for kidswear with a strong performance in menswear. Online clothing remained in growth, though slowed on last month. Footwear was the best performing category. While garden furniture and DIY goods are usually boosted by good weather, no dramatic increase in demand was seen. Elsewhere, small kitchen appliances also suffered and computing saw a small improvement in the rate of decline in June. Stock fulfilment was said to be less of an issue in comparison to earlier in the year, thanks to the easing of the chipset shortage and the reopening of Far East manufacturing. Jewellery & Watches saw growth pick up, helped by the wedding season and much-delayed social events. The Health & Beauty category continues to grow YoY and is now up for the first time this year on a three-year basis. Toys & baby equipment were down YoY. Outdoor toys were particularly popular in half term/Jubilee week at the beginning of the month.
Associated British Foods ('ABF') added an important component to its Q3 FY22 trading statement on 21 June 2022 when it announced that its Primark discount apparel and homewares business will commence a Click & Collect ('C&C') trial before the CY22 year-end. We warmly welcome this announcement for a variety of reasons, albeit we stress that the Group has commenced a trial and not proved the concept.
Q3 - 12 weeks to 28th May, 2022 In line with expectations, group revenue is +32%, a function of stores being closed in the comparable period. Sales in the Food businesses increased 10% which reflected price actions to recover input cost inflation and volume increases in Ingredients. Primark total sales are 4% higher than the comparable pre-COVID period three years ago. LfL sales have been improving since the half year and for the quarter were 9% below pre-COVID levels three years ago; this compares with -10% 2YoY at the interims. UK sales were -4% (having been -8% 2YoY at the interims). Europe sales were -15% (versus -14% 2YoY at the interims). Total sales in the US in the quarter were 34% ahead of pre-COVID levels, with the benefit of new store openings. Going forwards, management continues to expect further inflationary pressures to impact H2 margins and thus continues to expect full year operating margins of 10%. Retail selling space has increased by a net 0.3m sq ft since the beginning of the financial year and management continues to expect to open 0.5m sq ft this financial year. Management now plans to launch a trial Click & Collect service towards the end of this calendar year in the UK across a range of children's products. The trial will take place in up to 25 stores in the northwest. The Click & Collect service will build to offer customers some 2,000 options across clothing, accessories and lifestyle products. Trading across Grocery, Sugar, Ingredients and Agriculture has been broadly in line with expectations, with constant currency sales growth of 4% (H1:+2%), 7% (H1:+20%), 24% (H1:+10 %) and 10% (H1:+24%) respectively. Grocery benefitted from price increases implemented earlier in the year and further pricing action is underway. Elsewhere, world sugar prices are also expected to remain strong. Outlook and view Management’s outlook remains unchanged, with “significant progress” expected in adjusted EPS. Relative to Next, Primark continues to struggle to bring LfL sales back to pre-pandemic levels, but trialling Click and Collect could be a significant development that will likely benefit store economics. In the meantime, it is pleasing that margin guidance at Primark has not deteriorated despite sterling weakening. The valuation remains undemanding on 10.7x FY23E PE.
Total retail sales declined 1.1% versus a 3-month average growth rate of 0.7% and 12-month average growth of 3.1%. LFL sales were down 1.5%. This is the second month in a row in which UK retail sales declined, with sales volumes seeing significant declines as increasing inflation hits discretionary spending and is driving the cost-of-living crunch. Over the 3 months to May, food sales were down 0.7% (12-month average +0.6%), with food sales up in May YoY. Non-food 3-month average sales were up 2% (12-month average +7%), with non-food sales down in May YoY. In-store 3-month average sales of non-food items were up 24.1% as they are still up against last year’s COVID restrictions for part of the period and the pick-up in spending that followed. Online non-food sales were down 8.5% in May (3-month average decline -18%) with online penetration falling to 38.7% from 42.2% last year, though still higher than pre-pandemic. Higher value items such as furniture, home appliances, and electronics took the biggest hit, with homeware also struggling. Demand for large furniture items such as beds, sofas, and dining tables continues to slow, with home accessories recording its steepest decline in sales since April 2020, and down versus 2019. Home textiles moved into positive territory for the first time this year compared to 2019. Household appliances recorded its worst performance since the category started to be recorded in 2014. White goods were particularly impacted in May, with evidence of trading down too. Availability is improving and shipping costs are starting to come down. May also saw a sharp decline in computing sales. TV sales were also down. Fashion (clothing, footwear, and accessories) and beauty did well, benefiting from holidays and a step up in socialising and events versus last year. Clothing is still ahead of pre-pandemic levels with demand for formal wear strong due to the wedding season and the return-to-work. Footwear saw solid double-digit growth in May. Beauty moved into positive territory for the first time this year. Gaming consoles continue to see good demand, though supply remains an issue. Demand for Toys and Baby Equipment continues to wane as the squeeze on spending power weighed heavily on entertainment for households, according to the BRC. The BRC also reports that better availability of garden furniture is a relief to retailers and weak footfall levels remain an issue for department stores.
Associated British Foods^ (ABF, Buy at 1,705p) Shore Capital Markets recently visited Edinburgh, where it must be said that Princes Street as a retail destination is not what it used to be; that is, it a lot less desirable. The prime energy the city from a retail chain store perspective has shifted east to the new St. James shopping centre on which we have mixed thoughts. Link to photo pack included in this note.
The UK Government deserves credit for furlough. Whilst retained for too long it brought comfort to millions of households. Inflation was not transitory in CY21 Governor, overly lax monetary policy, now tightening too late, fuelled demand and upward prices, materially compounded by Russia's heinous acts in Ukraine. With NIC (and base rates) rising living standards dived in April, reducing aggregate demand. We expect firms to cut variable costs, vacancies to contract, unemployment to rise and job security to weaken - not ideal for consumer confidence, the housing market or expenditure. High state debt constrains policy options, perceived extravagance would weaken sterling importing inflation. Anticipated home heating price rises in October materially compound matters, including labour shedding; a horrible political cocktail for the incumbent Government and a troublesome context for consumer equities, especially those of a more discretionary nature.
ABF TSCO SBRY MKS AO/
Following on from the Group's 28 February trading statement, Associated British Foods ("ABF") has issued H1 FY22 results (to 29 February, it has a September year-end) that we see as robust noting management's current guidance is for "significant progress in adjusted operating profit" against the backdrop of higher than previously anticipated inflation across the business, which means Primark too will now be increasing prices in the forthcoming season. Accordingly, we provisionally lower our FY22 financial estimates to c125p of EPS, with an EPS downgrade to c130p for FY23 given the time delay in price recovery with H2 22/H1 23 margins now expected to be a bit weaker than previously anticipated.
AB Foods reported a solid 1H’22 with group sales and adj. operating profits ahead of pre-COVID levels. Primark sales were -10% LfL vs. pre-Covid (UK -8%, C. Europe -14%) as Omicron impacted footfall, but it is now recovering well in UK&I. Positive LfL growth in retail parks and +1% in the U.S. vs. pre-COVID continue to provide positives. Primark’s profitability has improved further with operating margins at 11.7% (1H’20: 11.9%) despite the LfL sales fall. However, inflationary pressures have risen further leading to a full year guidance cut as Foods and Primark margins in 2H’21 will now be below prior expectations (we estimate a c. 5% cut to consensus). We remain positive on Primark, its plans to expand space aggressively over next five years, its initial foray into online and underlying profitability improvement, which underpin our expectations for AB Foods to deliver consistent double-digit shareholder returns. The shares trade at 10.8x forward PE multiple and 5.2x EV/EBITDA; a >50% discount to 10-year averages. Reiterate BUY.
Interim results, 24 weeks to 5th March 2022 Group Adj. PBT is £666m, +109% YoY and ahead of consensus expectations of £526m, driven by performances in Primark and the Sugar businesses, while the food businesses have been impacted by food price inflation. Net cash before leasehold liabilities is £1.7bn and the interims dividend is 13.8p (LY: 6.2p). Primark: Sales have already been pre-reported with 2-year total sales -4% 2YoY with LfL sales at -10% 2YoY (LfL 2YoY UK: -8%, Europe: -14%, US: +1%). Primark operating profits are £414m, ahead of consensus at £211m and +863% YoY - following prolonged periods of store closures in the UK and Europe last year. The result implies operating margins in the period are a touch ahead of pre-close guidance of 11%, at 11.7%. Performance has been driven by improving sales densities, lower store labour costs and currency gains arising from the weaker US dollar mitigating inflationary pressures. Pleasingly the roll out of Oracle has been completed and the supply chain disruption experienced in Autumn/Winter last year continues to alleviate. Going forward management now expects further inflationary pressures to impact H2 margins and thus expects full year operating margins of 10% versus 11% previously (consensus: 11%), implying H2 operating margins will be c.10% versus 11% in H2 last year. The pipeline for new space has not changed since the pre-close statement, with management expecting to open 0.5m sq ft for this financial year, having opened 0.2m sq ft to date. Elsewhere Sugar profits were £77m, +17% YoY (versus consensus £65m) driven by both higher domestic sales volumes in Illovo and Azucarera and higher sugar and bioethanol prices, albeit offset by higher input costs. Grocery profits were £175m, -12% YoY (versus consensus £186m). Ingredients profits were £63m, -19% YoY (versus consensus £72m). Agriculture full year profits were £15m, -21% YoY (versus consensus £16m). Outlook Management now expects a greater margin reduction (from inflationary pressures) in the food businesses than previously expected for the full year, and thus expects the recovery in the run-rate of these margins (from implementing prices increases) to take longer with more margin recovery now occurring in FY23. At Primark, as forementioned, management expects full year margins of 10% (11% previously). In general, notwithstanding the greater inflationary pressures, the group outlook remains for “significant progress” in profits this year. As such, we expect today’s beat to expectations to be broadly offset by the deterioration in H2 margin outlook, leaving market forecasts broadly unchanged this year. The valuation on this basis looks undemanding on 10.8x FY23 PE.
Total sales increased by 6.7% in February (3 month average +6.5%) with LFL +2.7%. Comps remain weak from last year’s COVID restrictions (non-essential retail stores were closed) versus a dampening of sales from Storms Eunice and Franklin as well as declining consumer confidence. As in recent months, non-food sales continue to outpace food, reflecting the bounce back from last year’s non-essential store closures. Non-food 3 month average sales increased 12% with LFL sales +6.9% YoY when the UK was subjected to lockdown restrictions. 3 month average food sales increased 0.1% with LFL sales -0.3%, with food sales down in February but still ahead of 2020, part of this down to inflation. In-store non-food sales grew 71.2% with LFL sales up 57.2% reflecting weak comps. Online non-food sales fell by 28.4% in February, compared with growth of 82.2% in February 2021. The non-Food online penetration rate fell to 40.8% in February from 65.4% in February 2021, though it was up from 30.8% in 2020. Clothing and footwear categories saw double-digit growth in February, similar to January, as restrictions lifted and consumers headed back to the office. Household goods continued to perform well, though at a slower rate than January, with larger items continuing to sell well due to the number of interest free finance options around. Furniture remained in positive territory with the house textiles category in decline. Growth in health & beauty remained strong with beauty strongest recovering from weaker sales during lockdowns. Weakest categories were computing and household appliances, which were down year-on-year. Logistic issues continue. Toys also declined, not helped by half-term coinciding with the storms. Looking ahead, as comps begin to normalise and with material headwinds on consumer discretionary spending, current demand is likely to slow given the impact that inflation, rising energy bills and national insurance increases are likely to have on discretionary spending. Inflation is set to rise further in April with the increase in the energy cap. In addition, retailers are going to have to compete with leisure for discretionary spending as COVID restrictions have lifted. With the recent market rotation, the non-food retail sector is down 24.4% year-to-date and many valuations are undemanding, in our view. Most retailers have guided to flatter growth year-on-year or to profit declines, given the expected weaker demand ahead and cost inflation from the return of rates, national insurance increases and general cost inflation. Our preferred stock picks are the longer term growth stories, which are less reliant on the underlying consumer, such as JD Sports, Watches of Switzerland, WH Smith, Dr Martens, B&M and Halfords.
SAS - Investing in climate change adaptation, FTSE index review, Associated British Foods, Travis Perkins, Morgan Sindall Group, Uniphar, FirstGroup, GetBusy, Mining LOWdown, Market Highlights
ABF TPK MGNS UPR FGP GETB BAYN CRDA BLND
Why Resilience, rather than Valuation / Growth? We believe ourselves to be in an “end of the beginning” phase, as investors confront headwinds that are growing in both number and severity, just as the pandemic fires fade. The average and median CY22E EV/EBITDA of our covered stocks remain <9x, and median CY22E PE is at a discount to the 10-year median NTM level. We expect EPS to outpace revenue (CY22E/CY19A), with median forecast uplifts of 13% and <11% respectively, reflecting a widespread and enforced focus on cost management that we believe will prove persistent for most of our stocks. Valuations do not overly concern us, resilient models – and their implications for earnings deliverability – do. We review stocks from our sub-sectors in Special Situations, Distributors, Recruiters, Advisory, Utilities, and Construction, and employ a disciplined and objective screen to uncover those we believe will deliver in challenging times, and those that we think will struggle. Changes to recommendations and TPs: We cut Mears and Sanne to Hold from Buy (HMG/contract risk and bid valuation respectively) and raise Knights Group to Buy from Hold on valuation grounds. Our target price rises by 20%+ on Alpha FMC reflecting sustained and enduring tailwinds, combined with exceptional recent execution. Midwich stands out for us as a materially undervalued compounder, with the greatest M&A potential and earnings momentum (30%+ average consensus EPS upgrades since Mar’21) in our coverage. We believe Midwich is the best placed distributor to pass on inflation, and that its AV focus makes it a major long-term beneficiary of structural change to communications in the “new normal”. Recovery plays: strength building, patience required. IWG’s bold ambition, potentially to split the business to enhance focus and create value, aligns with its audacious ambition to disrupt the global office market. JSG’s mission-critical workwear, net cash and M&A opportunities make it a compelling recovery opportunity that the market has left behind to date. Value picks, with, in our view, a safe yield >4% and a lower-quartile PE include Headlam (robust balance sheet, dominant market leader); Keller (global leader, asset backed); and Hargreaves Services (coal exit, 8% FCF yield). Renewi’s 3% yield (CY23E), stands out, as does its PE rating – one of the lowest in our coverage – which fails to reflect growth from the innovation pipeline, ATM recovery & the Renewi 2.0 programme. Ongoing caution, in our view, is merited on PayPoint where the success of its turnaround appears to be priced in, despite risks to growth in nascent businesses, and the biggest fall in the Altman Z-score rating in our coverage. A 10 minute podcast will shortly be accessible here where you can hear our team discuss these thoughts with Investec’s Head of Research.
ABF ABI ABI AFM BEG BIFF COST FRP HSP HAS HEAD IWG JD/ JSG KLR KEYS KGH MER MIDW OTB PAGE PAY RST RWA SNN SMS STEM SNKSY
ABF’s trading update for the 24 weeks to 5th February has confirmed a broad continuation of the trends highlighted in the relatively recent January trading update. The key features of the statement, as we see them, are:
AB Foods reported a solid 1H’22 with group sales and adj. operating profits expected to be ahead of the pre-COVID levels of 1H’20. Primark sales were down -4% vs. pre-Covid levels with an 8% increase in selling space offset by -11% LfL (UK -9%, C. Europe -14%) vs. two years ago as footfall was impacted by Omicron, but Primark is now seeing footfall pick up in most markets. Positive LfL growth in retail parks and +2% LfL growth in the U.S. vs. pre-COVID levels continue to provide some positive signs. Primark’s profitability has improved further with 1H’22E operating margins expected to be c.11% despite the LfL sales decline. Full year guidance at group level has been maintained although Food businesses are seeing cost inflation and margins at Grocery, Agriculture and Ingredients will decline in 1H’22E. We remain positive on Primark, with its plans to expand selling space and recovery in LfLs as the pandemic comes to an end to underpin our expectation of AB Foods delivering consistent double-digit shareholder return over the next few years. The shares trade at 13.8x forward PE multiple and 6.5x EV/EBITDA, a 40% discount to 10-year average multiple which appears cheap. Reiterate BUY.
FTSE 100 ASSOCIATED BRITISH FOODS^ (ABF, BUY, 1960p) – H1 trading update, FY22 guidance unchanged, continuing to look for “significant” progress
Pre-close trading ahead of interims for the 24 weeks to 5th March 2022 Trading across Grocery, Sugar, Ingredients, and Agriculture has been broadly in line with expectations, with constant currency sales growth of +2% (P1*:+2%), +20% (P1:+12%), +10% (P1:+8%), and “well ahead” (P1:+10%) respectively. Primark sales are up 60% (P1: +36%) given softer comparatives last year when stores were closed. Primark: Trading in the remaining 8 weeks is expected to be in line with P1 trends with LfLs at -11% 2YoY (P1: -11% 2YoY). Total sales are therefore expected to be -4% 2YoY (P1: -5% 2YoY). By way of reference, LfLs had previously deteriorated to -17% (2YoY) in P4 FY21, having been +3% 2YoY in P3 FY21 – the performance in P4 was impacted by further travel restrictions and the ‘pingdemic’. By geography, LfLs are expected to be UK: -9% (P1: -10% 2YoY), EU: -14% (P1:-14% 2YoY), and US: -2%. Management continues to believe supply chain pressures have eased over the period and, despite inflationary cost headwinds (in addition to extra supply chain costs), management reiterates its expectations of achieving operating margins of 11% in H1 (full year consensus expectations: 11%) owing to improving sales densities, lower store labour costs, and currency gain arising from the weaker US dollar. The pipeline for new space has not changed since the Finals, with management expecting to open 0.5m sq ft for this financial year. Outlook & view Given Primark’s stronger YoY performance, management expects sales and operating profit for the Group to be “strongly ahead of last year” as well as being ahead of the pre-COVID levels achieved in H1 FY20. While all food businesses have experienced inflationary pressures, management will mitigate these pressures with price rises, but expects action on price to lag input cost inflation and therefore anticipates margin reductions in these three businesses over H1, before recovering in H2. The Group outlook for the full year is therefore unchanged. Progress on recovering lost sales since the pandemic has been slower at Primark (versus other retailers), but profit recovery has been decent. While the cost outlook remains unfavourable, the business appears to have levers to pull. The shares trade on an undemanding 13x FY23E PE.
Associated British Foods, 4imprint Group, Wickes, Superdry, Mining LOWdown, Market Highlights
ABF FOUR WIX RIO CBG RTN SDRYN
Headlines. FY21 ARR growth is 10% cc, excluding MPP, with the traction seen in H121 (11% ARR) continuing into H221. The £34.4m exit ARR compares favourably to our FY22E P&L £34.6m software revenue estimate, suggesting our revenue forecast looks well underpinned. With no mention of profits we take it that profits are in-line. Net cash at year end was £15.3m vs our £10.7m suggesting another good year end cash collection position. MPP acquisition. Integration is progressing as planned, with the trading statement referring to investment in both functionality and technology to create an end-to-end subscription revenue automation platform, with development seen to finish H222. Implied year end MPP ARR was £7.4m versus c.£8m at the time of acquisition; this reflects the element of previously known ‘at risk’ ARR, so was to be expected. We anticipate that Aptitude cross sell interest into the MPP client base is strong, as clients seek to automate their finance and accounting processes. We would look for MPP new deal flow to accelerate as sales processes are integrated within the Aptitude business. Set up for a good FY22. H222 saw a material Aptitude Accounting Hub and Aptitude Insurance Calculation Engine SaaS deal with a global insurer, and an Aptitude Revenue Management and Aptitude Lease Accounting Engine win with a Californian health care company. It is encouraging to see these notable wins. Combined with further benefits from investment into Aptitude’s product suite (e.g. enhancing performance and user experience, as outlined in the statement and recent annual user conference) and an improving backdrop for enterprise software spend, this suggests to us that we should see accelerating new deal wins come through in FY22. View. The share price implies c.4x FY23E software revenue, which we believe looks too low assuming ARR growth can be driven >15%. If achieved this could re-rate the stock towards our 780p TP, based on 7x FY23E software revenue.
ABF APTD BARC GLO CRST G4M GOOD HSBA LLOY NG/ NWG PAY PFD SQZ SPT STAN ULVR SDRYN
AB Foods reported a solid 1Q’22 with group sales up 16% yoy and up 1% over pre-pandemic levels. Primark sales declined -11% LfL vs. two years ago as footfall was impacted by Omicron, but Primark is seeing the impact reduce in recent weeks. LfL growth in retail parks and +4% LfL growth in the U.S. vs. pre-COVID levels are positive signs which suggests scope for strong growth when public health measures have been lifted. Primark’s profitability has improved further with 1H’22E operating margins expected to be >10% despite the LfL sales decline, which bodes well for future when footfall normalises. Full year guidance at group level has been maintained although Food businesses are seeing cost inflation and margins at Grocery and Ingredients will decline in 1H’22E. We expect AB Foods to deliver consistent double-digit shareholder return over the next few years, and at 16x forward PE and 7x EV/EBITDA, the risk-return profile appears very attractive. Reiterate BUY.
P1 trading, 16 weeks to 8th January 2022 Trading across Grocery, Sugar, Ingredients and Agriculture has been in line with expectations, with constant currency sales growth of 2%, 12%, 8% and 10% respectively. Primark sales are up 36% (given softer comparatives last year when stores were closed). As such, total sales are +19%. Primark: Despite Omicron impacting footfall, in line with commentary made at the AGM statement, P1 trading has improved with LfLs up to -11% 2YoY, compared to Q4 last year when LfLs deteriorated to -17% (2YoY), and versus +3% 2YoY in Q3, with performance in Q4 impacted by further travel restrictions and the “pingdemic”. Total sales in P1 are -5% 2YoY. Pleasingly, management believes with Omicron cases falling, trading has improved in recent weeks. By geography, LfLs are UK: -10% 2YoY, EU: -14% 2YoY, US: +37% 2YoY versus +3% 2YoY in Q4 last year. In the meantime, management believes supply chain pressures have eased over the period and despite inflationary cost headwinds (in addition to extra supply chain costs) management believes it is on track to achieve operating margins greater than 10% in H1 (full year consensus expectations: 11%) owing to improving sales densities and the benefit from lower store labour and operating costs as well as currency gains arising from the weaker US dollar. The pipeline for new space has not changed since the Finals, with management expecting to open 0.5m sq ft for this financial year - having opened 0.2m sq ft to date. Management continues to focus on accelerating the roll out of stores in the US, France, Italy and Iberia. Outlook & view Going forward, management expects performance to improve at Primark between now and April (given stores were closed this time last year). While the remaining businesses have seen an escalation in energy, logistics and commodity costs, management plans to mitigate these with operational cost savings and price increases. As such, they expect Sugar profits to increase, but for margins to fall in Grocery and Ingredients at the half year. All in all, guidance remains unchanged, with management expecting full year profits to make “significant progress”. The shares trade on 14.0x FY23E PE. The acceleration in US performance is eye catching, but it remains a small part of the overall business. Whilst Primark is geared to recovery, we see better value elsewhere in the sector right now.
December Retail sales were up 2.1% (3 month average +2.7%) with LFL sales +0.6% year-on-year, despite a strong November print and the emergence of Omicron with a return to working-at-home advice, curtailing of social events and increased restrictions/concerns generally. Consumers switched online, with online non-food sales up 24.7% on a 2 year basis while in-store non-food sales fell 7.7% on a 2 year basis. Online penetration fell to 45% from 52.5% last year reflecting differences in restrictions, vaccination rates and consumer confidence. Footwear was the only online category to see mild growth as overall online sales continued to decline, down over 8% in December. Food spending was solid and back in growth (+0.3% total 3 month average, with LFL +0.1%), despite a strong comparative as family and friends were able to meet this Christmas. Food inflation accelerated to 2.4% in December from 1.1% in November. Total non-food sales (3 month average) were up 4.8%, or 1.4% on a LFL basis, with non-food sales positive in December. Apparel and jewellery sales dominated Christmas gifting. Clothing sales growth slowed versus November and sales were still down on pre-pandemic levels. There was strong demand for leisurewear, but occasional wear did not do as well. Online clothing sales in December was at the lowest rate recorded through 2021. Health & Beauty sales were still lower than pre-pandemic and declined more in December vs November. Beauty continues to underperform the health category. Furniture sales fell into decline on a 2 year basis for the first time since March as supply chain issues and longer lead times continue. The Home Accessories rate of decline on a 2 year basis seen since September slowed in December, with decorations and tableware popular for people to make the most of Christmas. House textile sales declined on a 2 year basis for the fourth consecutive month. Against tough comps, the Household appliances rate of decline increased in December year-on-year, though sales were still positive on a 2 year basis. Stock availability and logistics remains an issue. Tech spending waned and traded below its pre-pandemic levels for the second consecutive month. The release of Windows 11 had little impact on Computing sales. 2022 is expected to be another challenging year for retail with significant headwinds to confront from a demand and supply perspective as well as COVID disruptions. Consumer spending is likely to come under pressure from rising inflation (a 10 year high in December), higher energy bills and April’s National Insurance rise. Retailers also have labour shortage to contend with, and continuing higher transport and logistic costs.
ABF ASC BME DEBS CARD CURY DOCS DNLM GRG HFD JD/ KGF MKS WINE NXT SDG SCS SMWH WRKS WOSG SDRYN
The time to buy is before the newsflow turns, despite heightened Covid risks Investors have several concerns about AB Foods: Covid risks, Primark''s lack of online, low pricing power amid industry inflation, weak LFLs, online competition from Shein, and ESG. But here''s the thing. By the time these worries recede, which we expect them to as Primark returns to double-digit profit margins, it could be too late. We see current valuation as a Major Major buying opportunity. The dilemma: AB Foods is only cheap when investors don''t want to own Primark We tend to think that the food divisions, combined c.50% of group sales and profits, don''t fluctuate much in value. Hence when AB Foods'' shares fall, the implied valuation of Primark falls at twice the pace. The time to own AB Foods is when investor concerns push Primark into deep-value territory: we think that time is now, and feel optimistic about improving sentiment in 2022. Primark: cheap and - some reasons to be - cheerful Not all the debates will be settled in 2022. New covid variants add risks. But we see a path back to double-digit margins and GBP 1bn profits which should reassure about its competitive position. We also expect progress with its digital and ESG strategies to drive new customer acquisition. Food divisions: a tasty catch for 2022 In 2022 we expect the combined food divisions to generate all-time-high profits and record margins. Driven by continued strength at Twinings-Ovaltine (high single-digit cFX growth in FY 21) and higher sugar prices, the food outlook is positive and somewhat mitigates Primark''s covid risks. Valuation back to 2020 levels; multiple reasons to look forward to 2022 AB Foods'' AGM last week provided approval for its first ever share buyback programme, of up to 10% of its share capital. This should support earnings momentum, which lagged the sector in 2021. But the big prize is a multiple re-rating: we show Primark trades on an implied single-digit P/E...
Associated British Foods ("ABF") has issued a relatively short, but we deem encouraging and so reassuring update for trading in the early periods of FY22; the Group has a September year-end.
AG Barr’s trading YTD has shown a good degree of recovery, this is partly driven by the soft drink category as restrictions are removed, but also the strength of Barr’s brands. All of its core brands are now back to pre-pandemic run rates. The 1H PBT increase of 42.8% and good Q3 has led to higher FY22E expectations. Although the 1H results benefited from some one-off factors, there has been good underlying improvement through the first 9 months too, which will carry the group into FY23. Market data shows the beverage category is returning to more normal consumption patterns as the “on the go” formats recover. Hospitality markets are also rebounding well, led by younger consumers, which is helping to drive cocktail demand. Funkin’s on-trade sales are booming, but, interestingly, not at the expense of the newly developed take-home cocktail offer. Revenues ex-Rockstar for FY22 are expected to exceed the previous peak in FY19, as too are profits. The 1H margin (17.7%) was unusually high and will not be repeated as marketing costs are weighted to 2H and there will be less operational gearing benefit from the one-off volume boosts. Alongside peers in FMCG, the group has flagged rising costs. Hedges protect this year; they roll off through FY23 but plans are in place to recover this inflation. Looking out to FY23, some one-off factors in 1H22 will be absent, but so too (hopefully) will be any drag from COVID, plus the underlying momentum is good. Hence, we still anticipate continued growth in revenues and profits and forecast FY23E PBT will be only 7% off the previous FY19 peak (or ahead on LFL basis). It seems unjust that the share price is still lagging FY19 levels (over 800p) by some margin. Our TP, which edges up to 690p on latest peer multiples, shows the extent of the discount on this quality business.
ABF BAG FEVR NICL BTVCF
FTSE 100 ITV^ (ITV, BUY, 112p) – Upbeat investor seminar ASSOCIATED BRITISH FOODS^ (ABF, BUY at 1934p) Upbeat, reassuring AGM statement - Primark ahead of plan - upgrade potential Shore Capital Media News Includes articles covering: WPP, Informa, ITV, OnTheMarket, BT Sport, Discovery, Guardian, film and TV production, Hipgnosis, Stadia, GB News, TikTok
Associated British Foods plc ITV PLC
Trading since September has been ahead of expectations at Primark, with sales and margins both “ahead of expectations”. The shares currently trade on c.13.0x steady-state FY23E PE and offer moderate growth - beyond recovery in FY22 - from Primark rolling out space internationally Trading since September Trading across Grocery, Sugar, Ingredients and Agriculture has been in line with expectations. YTD Primark trading has been “ahead of expectations” with improved LfL sales compared to Q4 last year, when LfLs deteriorated to -17% (2YoY) versus +3% 2YoY in Q3, with performance in Q4 impacted by further travel restrictions and the “pingdemic”. Despite supply chain disruptions management believes it has adequate stock cover over the vast majority of its lines, and margins to date at Primark are also “ahead of expectations”. Previously, at the Finals in November, management expected that lower store labour and operating costs would offset supply chain and raw material inflation, and thus expected operating margins in FY22 of >10% (consensus: 11%). Going forward management now expects Primark sales to be “significantly better” compared to the period last year from December 2020 to April 2021 - when the estate was largely closed. As such management continues to expect “significant progress” at both the half and full year, in adj. operating profit and adj. EPS for the Group. The shares trade on 13.0x steady-state FY23E PE.
November’s total retail sales increased by 5% (3-month average +2.2%), with LFL sales up 1.8% (3-month average +0.2%). This is the highest level since July and was helped by Black Friday, which became a month long affair. Many retailers extended their events to encompass the 3 weeks before. Last year, Black Friday was not such a big event given the pressure on physically picking orders and delivery fulfilment capabilities. Total food sales increased 0.1% on a 3-month average basis (LFL down 0.5%) with total non-food sales down 3.9% (LFL -3%). Food & drink struggled in November YoY as it was up against strong comps in the run up to lockdown 2. On a 2-year basis, total non-food in-store sales were down 5.1% (3-month average down 3.1%), with LFL sales down 3.4%. Online sales were up 18% on 2 years ago, below the 3-month average of 23.4%. Consumers took advantage of discounted clothes, shifting the Black Friday focus away from just electronics and electricals. In November, non-food online sales fell yet again as consumers became more confident and headed to the High Street. Fashion-related sales were particularly good in November. Apparel and jewellery dominated Christmas gifting, though clothing sales were still slightly down versus 2 years ago. Online clothing performance was strong on a 2-year basis with in-store sales still significantly below 2019 levels. Footwear had some availability issues with men’s formal footwear said to have performed well. Overall, women’s footwear was stronger than men’s. Limited Black Friday promotions saw big ticket items for the house and technology put on hold. Home appliances performance was better in November than October. Household Appliances are continuing to suffer from their success earlier in the pandemic. Computing saw the same rate of decline in November as October, not helped by the worldwide chip shortage. The Beauty category returned to double-digit growth with make-up, fragrance and skincare products all performing well. Overall, the Health and Beauty category continued to perform below 2019. Online Health & Beauty category continues to grow significantly ahead of pre-pandemic levels. Furniture returned to growth in November after 4 consecutive months of decline, though last year’s comp was weak ahead of lockdown 2. Demand is likely to also have been impacted by long lead times from supply chain issues with many models not able to be delivered in time for Christmas. Home accessory sales remain in decline on a 2-year basis, though the decline was smaller in November than in September and October. Online sales remain very strong versus pre-pandemic. On a 2-year basis, the Home Textiles category recorded a decline for the third consecutive month in November. Stock issues continue to impact the Toy and Baby equipment category.
ABF ABI ABI ASC BME DEBS BATS CARD CARR CURY DOCS DNLM FUTR GRG HFD IOM JD/ KGF MKS WINE NXT PAG RENX SDG SCS SMWH WRKS WOSG SDRYN
Theme 1: Animal dynamics. (i) Rising production animal demand: We expect demand for sustainably produced animal protein to continue to rise, driving the production animal industry’s need for sustainable, productivity-enhancing solutions, including advanced nutrition, veterinary medicines and genetics. The associated animal stocks in our coverage also present solid ESG credentials relating to rural employment, climate impact and improved use of land and water resources. (ii) Ongoing companion animal market resilience: Despite uncertainty on UK companion animal numbers, to us, industry datasets still suggest the potential for continued subsector performance. Positive trends on pet insurance, combined with the greater time that owners now spend with their pets, in our view, underpins the potential mid-term upside for subsector participants. Theme 2: Valuation-sensitive catalysts. The healthcare sector benefits from numerous catalysts, with technical and regulatory challenges translating into price-sensitive outcomes. We detail Abcam, Advanced Medical Solutions, Alliance Pharma, Clinigen, Dechra Pharmaceuticals, ECO Animal Health, Genus, Oxford Biomedica, Renalytix and Silence Therapeutics as potentially benefiting from defined near-term events. Theme 3: Post-Covid recovery plays. Hospital waiting lists recently reached all-time highs, with some commentators suggesting that foregone referrals will drive them materially higher. Addressing the backlog remains critical. We envisage, as this happens, that the stocks affected by reduced routine hospital activity will see the increment. UK listed hospital volume plays include Advanced Medical Solutions, Clinigen, Medica and Tristel. Top Picks. We highlight Alliance Pharma as our current top pick in the Value category and Dechra Pharmaceuticals, EKF Diagnostics Holdings and Tristel as our current top picks in the Growth / Catalyst category. Recommendation / Forecast changes. Abcam: Changing year end, with c. 12%/7% CY21/22E EBITDA downgrades (partly on FX); Advanced Medical Solutions: PT up 10% on LT growth assumptions; Benchmark: minor TP upgrade post positive update; CVS: c.4% EPS upgrades drive PT up 7%; ECO Animal Health: minor downgrades to China generics sales estimates; Oxford Biomedica: FY’21-22e upgrade post interims and £50m SSL investment; Silence Therapeutics: minor upgrade post Hansoh collaboration; Tristel: FY’22e materially unchanged, lower early US Jet sales FY’23e.
ABF ABC AMS ALFA AFM BEG CVSG DPH EAH EKF FRP GAMA GNS IDHC KEYS KGH MGP OXB OXIG RENX SNN SMS TSTL WOSG DVL 9H4 SNKSY DIISF BHCCF
The shares have been weak following the softer Q4 Primark performance, but the outlook is improving, especially with regards to margins (despite obvious headwinds) and management expects further progress in profits in FY22. A special dividend has been announced today and the valuation remains undemanding on 11.7x FY23E PE Full year results, 53 weeks to 18th September 2021 Group Adj. PBT was £908m, -1% YoY and ahead of consensus expectations of £835m - driven by performances in Primark and the Sugar businesses. Net cash before leasehold liabilities was £1.9bn, in line with previous guidance and the final dividend is 20.5p - with management also announcing a further special dividend of 13.8p, bringing total dividends to 40.5p for FY21. Outlook: Despite inflation and some supply chain disruption, management expects profits to “progress” next year. Primark: Sales have already been pre-reported and were –5% YoY with LfL sales at –12% 2YoY. Primark profits were ahead of expectations at £321m, -11%YoY (consensus £279m) and were +15% (before repayment of job retention monies) which implies that H2 EBIT margins improved to c.10.6% from 1.9% in H1 (before repayment of job retention monies), in line with recent management guidance. Margins in H2 benefited from a significant reduction in store labour costs, driven by lower store headcount and improved labour scheduling, and lower store operating costs. In recent weeks, the group has experienced some further supply chain disruption, but stock shortages impacted only a small number of lines. In the meantime, management expects operating margins of >10% for FY22 (consensus: 11%). Pleasingly, autumn/winter ranges have started well and sales densities continue to improve The pipeline for new space has not changed with management expecting to open 0.5m sq ft for the next financial year, however management has outlined ambitions to accelerate the roll out of stores more quickly in the US, France, Italy and Iberia and is now targeting to open 520 stores, from 398 today. Elsewhere Sugar full year profits were £152m, +52% YoY (versus consensus £143m) with performance driven by strong volumes in Illovo and China and higher prices in Europe and Africa. Grocery full year profits were £413m, -5% YoY (versus consensus £413m). Ingredients full year profits were £151m, +3% YoY (versus consensus £158m). Agriculture full year profits were £44m, +2% YoY (versus consensus £46m).
Total retail sales were up 0.6% year-on-year in September, which is below 3-month average growth of 3.1%. LFL sales were down 0.6%. The industry’s performance was healthy towards the beginning of the month, but this came to an end when the autumnal weather arrived, coinciding with the fuel crisis. Online sales growth continued to slow, with sales down 7.3% on last year, but online penetration is still high at 40.1% (44.9% in September 2020) versus pre-pandemic penetration, showing the channel shift. Non-food in-store LfL growth was up to +6.6% for the three months to end-September (12-month average +23.3%), having been +16.7% (three months to end-August). The shift to more normalised spending continues, with non-food 3-month average total sales up 3.8% (LFLs up 1.6%) and food sales up 2.3% (LFL 1.7%). Clothing, footwear and accessories continued their strong recovery in September, albeit at a slower rate. Cooler weather towards the end of the month helped winter fashion while demand for men’s smart and formalwear ranges also bounced back. The later return to school resulted in the back-to-school rush for uniforms which continued later in the year than usual. Stock availability and supply chain issues continue to hamper sales for some retailers. Health & Beauty continues to perform below pre-pandemic levels, though sales of beauty products performed well, helped by an increase in social activities, and they outperformed health-related products. Furniture sales remain down year-on-year with the steepest decrease recorded since February, not helped by supply chain issues, although on a 2-year basis sales are still up. Home accessories and home textile sales were also down year-on-year with a steeper decline reported in September, as the focus shifts away from the home. Household Appliances saw its rate of decline ease somewhat in September, from August’s record fall. On a two-year basis, the category continues to trade above 2019 levels. Smaller items performed relatively better than larger items, given that the fuel crisis meant fewer people were driving to shops to take home large goods. Gifting began to see demand increase too – a sign that Christmas shopping has already begun. Computing sales were also down for the fifth consecutive month, although they are up on pre-pandemic levels.
ABF ASC BME DEBS CARD CURY DOCS DNLM GRG HFD JD/ KGF MKS MMH WINE NXT SDG SCS SMWH WRKS WOSG SDRYN
We believe biodiversity is on the verge of becoming as big a concern to policymakers – and by extension to companies – as greenhouse gas emissions. The two factors are deeply interrelated, but biodiversity has been overlooked in the past. Fortunately for all life on the planet, that is now changing. The Dasgupta Review, published earlier this year, argued that natural capital should be considered an economic asset and was hailed as a landmark piece of research. The UN’s Decade on Ecosystem Restoration runs from 2021-2030 and will drive a global movement to increase conservation efforts. The G7 leaders agreed to support global biodiversity targets, including a proposal ahead of COP15 to protect or conserve at least 30% of land and oceans. Considering that species populations have declined by an average of nearly 70% over 1970-2016, time is of the essence. Biodiversity provides many goods and services to society and to businesses; the total economic value of these is estimated to be $169-$184trn, or 1.3-1.4x global GDP. However, land use change (for agriculture, mainly), over-use of resources, global warming due to emissions, plastics and chemical pollution and other factors are harming biodiversity. The economic costs of this can be significant, with outbreaks of zoonotic diseases (where pathogens jump from wild animal to human, due to loss of habitats) regularly running into the tens of billions of dollars, and the COVID-19 virus – thought by some scientists to be zoonotic – estimated to cost $28trn by 2025. Companies are already taking note, but disclosure frameworks are uncertain. Standardising data is particularly challenging for biodiversity given the various ways to measure it. The TNFD will propose a disclosure framework in 2023, based on the framework decided at COP15. In the meantime, companies are using a variety of methods and metrics to communicate their progress, but we note some themes are already starting to develop. Approximately 50% of the FTSE 100 and 20% of the FTSE 250 have a biodiversity policy in place. This broadly tallies with continental European levels of disclosure, and is ahead of the US. UK Water and Paper & Packaging companies were early movers in biodiversity, unsurprisingly, but Consumer companies are quickly catching up, as are Industrials. We discuss a number of UK companies that we think are making a significant effort on biodiversity, including Associated British Foods, Cranswick, Diageo, DS Smith, Greggs, Kingfisher, Marks & Spencer, Mondi, Pennon, Ricardo, Severn Trent, Smurfit Kappa, Spirax-Sarco, Unilever and United Utilities. We also propose some suggested disclosures to help investors better understand their biodiversity risks.
ABF ABI ABI CWK DGE SMDS GRG IEM KGF LLOY MKS MNDI WINE NWG PNN RCDO SVT SWR SPX TET ULVR UU/
UK Primark’s Q4 trading was negatively impacted by the ‘pingdemic’, with LFL sales down 24% in the first 4 weeks and down 8% in the most recent 4 weeks. Whilst challenging for sure, it is important to note that Primark’s UK market
Following on the Associated British Foods' FY21 trading statement on Monday 13 September, when the Group signalled a ‘beat’ to its expectations, Shore Capital hosted an investor call with management. We highlight the key features of the update and investor call, a Primark Cares announcement and confirm forecast upgrades.
Chesnara is to acquire Sanlam Life & Pensions (SLP) for £39m, its first UK deal since 2013. The price paid equates to 1x Chesnara’s estimate of SLP’s FY20 Own Funds, and a 19% discount to Chesnara’s estimate of Economic Value (EcV) of £48m. Both ratios are before £2.8m of transaction costs. The deal is to be debt funded, and is expected to complete in Q1 2022. It will increase the EcV leverage ratio from 6% to 15%, and lower group Solvency II ratio from 156% at FY20 to 142% (Chesnara’s H1 21 SII ratio was 153%). The majority of the £3bn portfolio is unit-linked pensions, mainly invested in equities. The book is open, employs 100 FTES, and will be closed to new business and moved to Chesnara’s outsourced model upon completion. All costs of these changes are reflected in the £39m Own Funds estimate. Paying over 100% of Own Funds after costs and increasing leverage, we see the rationale of the deal in a step up in cash generation, estimated at c.£5m per year on a steady state basis, against FY20 UK cash generation of £29m, and FY dividend costs of c.£34m. This will be supported by real world returns above the risk free, run-off of the risk-margin and future synergies, none of which are captured in Own Funds or EcV. We update our forecasts for the recent H1 results, making a small cut to solvency after the H1 decline and immaterial cuts to IFRS profit forecasts, but update only solvency forecasts for SLP, with a step-down in solvency guided. On unchanged dividend forecasts of 3% growth p.a., we roll forward our target price basis from FY21E to FY22E on an unchanged 6% target dividend yield, and this drives an increase from 370p to 385p. We think investors should take comfort from the increased cash generation from this deal, and note that Chesnara traded at a premium to the sector on a yield basis prior to 2019.
ABF AV/ BAKK CNA CSN DVO FIF GNC ITM MCB PHNX STEM
AB Foods reported a strong 4Q’21 profit performance at both its food and Primark businesses, leading to FY’21E earnings upgrade. However, Primark 4Q’21 sales were below expectations, down -17% LfL vs. two years ago, as the “Pingdemic”, trading restrictions, and lack of tourism continued to impact footfall, although there are signs of improvements as self-isolation measures were eased. LfL growth in the U.S., up 3% over two years ago, though suggests that the proposition still resonates well with customers when the public health measures have been lifted completely. Primark’s profitability has improved further with 2H’21 operating margins exceeding 10% despite the LfL sales decline in 2H. This should allow the company more room to re-invest in new stores, store relocations and in an increased online presence.
With higher profit expectations during Q4 in both Sugar and Retail offsetting lower profit expectations in Grocery, management now expect adjusted operating profit for the group, stated before repayment of job retention monies, will be ahead (previously flat year on year). The shares have recently de-rated, meaning the valuation looks undemanding on just c.12x ‘steady-state’ FY23E PE. Full year pre-close trading update 53 weeks to 18th September 2021 Primark H2 sales c. +55% cc versus Q3:+207% cc and H1: -40% cc. However Retail LfLs (on a two year basis) were -10% in Q4 versus +3% in Q3 when the re-opening of stores benefited from pent up demand. Performance by region (at Primark) has varied in Q4 pending on restriction levels. LfLs (on a two year basis) in the UK went from -24% (in the first four weeks of Q4) to -8% in the last four weeks. Similarly in Spain and Portugal, LfLs were down by more than 30% - with performance impacted by travel restrictions impacting tourism. In the US, LfLs were -3%. Despite this, management believes it has held value market share versus two years ago. Owing to a reduction in store labour and operating costs, management now expects Primark profits for the full year - stated before repayment of job retention scheme monies (£96m) - to be above last year’s levels, implying operating margins were over 10% in H2. Previously management had expected profits to be in line with levels last year (LY £362m) – before repayment of JRS monies. Looking ahead (at Primark) management believes operating profit margin will continue to benefit from lower store labour and operating costs and the effect on margin of supply chain and raw material inflation will be broadly mitigated by the weaker US dollar. In terms of new space, 0.7m sq ft has been opened year to date (in line with expectations), but next year COVID 19 restrictions means Primark will probably only open 0.5m sq ft – typically, Primark opened 1m sq ft p.a. pre-pandemic. Elsewhere, Sugar full year sales are +7% cc versus Q3: +21% cc and broadly in line with the +7% cc YTD at the Q3 stage, with performance driven by strong volumes in Illovo and China and higher prices in Europe and Africa. Grocery full year sales are expected to be ‘ahead’, versus Q3: -3% cc and +2% cc YTD at Q3. Grocery was impacted by tougher comparatives driven by the pandemic last year and profit will be below last year with performance driven by weaker corn oil margins at ACH. Net cash before lease liabilities for the group is now expected to be £1.9bn at the financial year end - previously it was expected to be ‘above £1.7bn’.
Total retail sales were up 3% year-on-year in August, which is below the 3 month average growth of 6.9%. LFL sales (excl. temporarily closed stores and online) were up 1.5%. Growth was mixed, not helped by the weather, with footfall still below pre-pandemic levels. However, retail growth rates continue to be higher than pre-pandemic levels, with August’s growth at 8.9% on a 2 year basis. Online sales growth continue to slow, with sales down 4.6% on last year, but online penetration is still high at 38.3% (39.3% in August 2020) versus pre-pandemic (29.5% in August 2019) showing the channel shift. Non-food in-store growth was up to 23.7% (12 month average +21.7%) with LFLs up 16.7%, and on a 2 year basis, sales are marginally below the level seen in August 2019. Shift to more normalised spending continues, with non-food 3 month average total sales up 10.3% (LFLs up 6.8%) with food sales up 2.9% (LFL 1.9%). Bank holiday weekend and back-to-school buzz contributed to the rise in non-food sales. There were healthy sales increases in apparel, but from a much lower base, whilst technology and furniture/appliance categories suffered against very strong comparatives in 2020 Clothing, footwear and accessories continued their strong recovery in August. Formal wear was strong, with weddings coming back and the gradual return to work. Demand for athleisure was also good. Back to school sales were not as strong as expected, mostly due to availability issues and challenges within the supply chain. Health & Beauty continues to perform below pre-pandemic levels, though sales of beauty products performed well, helped by an increase in social activities, and they outperformed health-related products. Furniture sales remain down year-on-year, not helped by supply chain issues, though on a 2 year basis sales were up double-digit in August. Home accessories and home textile sales were also down year-on-year after last year’s strong demand, as focus shifts away from the home. Household appliance sales fell this month, having been up in July. Cooler temperatures in August negatively impacted the seasonable uplift typically seen in refrigeration and fans/air-conditioning at this time of the year. Computing sales were also down for the fourth consecutive month, although they are up on pre-pandemic levels. Demand for TVs and gaming continue to be above pre-pandemic levels.
ABF ASC BME DEBS CNE CARD DOCS GAMA GRG HFD FSJ JD/ KGF MKS MIDW WINE NXT SAFE SDG SCS SMWH WRKS WOSG SDRYN
ABF ASC BME DEBS CARD DOCS GRG HFD JD/ KGF MKS MMH WINE NXT SDG SCS SMWH WRKS WOSG SDRYN
July’s total retail sales increased 6.4% yoy (June +10.4%) with LFL sales up 4.7% (June +6.7%) versus July 2020. LFL has been measured excluding temporarily closed stores, but including online sales. The lifting of restrictions did not result in an in-store boost as anticipated, with the wet weather and reopening of hospitality and leisure not helping. Non-food and food sales both grew yoy in July. Over the 3 months to July, total food sales were up 2.9% yoy (+3.2% in June) with LFL up 0.8%. Food and drink returned to growth in July after several months where sales did not hit the peak of post-Easter 2020. Non-food sales were up 24.6% yoy over the last 3 months (June +49.6%), with LFLs up 17.6%. Non-food in-store sales increased 64.9% with LFL +48.1% in July yoy, but fell back versus 2019. July’s online non-food sales increased 0.6% yoy (June down 5.9%) versus a three-month average decline of 4.6%. The online penetration rate decreased to 48.2% in July, from 54% the year before. Some signs that footfall patterns are starting to strengthen on the High Street as the tapering of the furlough scheme began and more people started to return to work at the office. Formal wear and beauty saw a noticeable bounce back helped by the resumption of weddings, social events and return to work. Fashion outlets (both men and women) saw a bounce back to pre-pandemic levels with warm weather at the beginning of the month helping summer wear. Beauty products outperformed health-related goods yoy for the first time since the start of the pandemic. Many other non-food categories had a less strong performance, especially those related to the home after the house moving frenzy of recent months started to abate. Despite supply chain issues continuing for some retailers, during July, Furniture sales saw solid double-digit growth on a 2-year basis. Home Accessories saw a slowdown in growth on a 2-year basis for the second consecutive month, while the yoy performance was in line with June, recording a decline from the same month last year. Home textile sales were ahead on a 2-year period. Household appliances returned to growth yoy in July. Consumers continue to want to buy white goods, and air conditioning benefited from the hot weather at the beginning of the month. Computing remained in decline for the third consecutive month in July on a year-on-year basis, though the category continues to trade above pre-pandemic levels.
We publish a deep dive on Shein, a $10bn-revenue Chinese real-time fast-fashion online pure player that retails exclusively outside China. Our proprietary web traffic analysis highlights how Shein has dramatically increased its market share in the US this year thanks to aggressive online marketing spend and is seeing similar dynamics playing out across the pond. With a business model reminiscent of boohoo’s test and repeat and targeting the same demographics, investors should be aware of the risk of intensified competition in the online and offline value spaces, initially in the US and progressively in the UK and Europe.
ABF ASC DEBS
Within ABF's Q3 FY21 trading update, after which we put through healthy upgrades to our FY22F and medium-term forecasts, there was one notable paragraph on Primark's evolving digital plans. We felt this to be significant as we believe it represents a potential threshold for this currently offline-only value retail powerhouse. That Primark outperformed the total UK apparel market following reopening post lockdown 3.0 (i.e. including online) is testimony to the power of the Primark brand. Indeed, we see many years of offline space growth by Primark, noting the opening of the 12th outlet in a now profitable USA. Whilst so, the lack of an online presence at Primark has soured the thesis of ABF for some investors and so the start of a digital journey is welcome to us. Domestic online competition, watch out! With digitalisation building at Primark, we reiterate our view that ABF equity on a FY22F EV/EBITDA rating of just 6.7x is grossly undervalued. BUY.
Personal lines insurers – Admiral’s pre-announcement sets a high bar. We expect strong H1 profits, primarily due to benefits from low Motor claims frequency due to lockdown, although Admiral’s results are likely to stand out, due to additional benefits from conservative prior year reserving, and its greater exposure to bodily injury claims than peers. DLG should benefit in particular from low weather losses in Home and Commercial. The negative in the results is likely to be Motor top-line; while Q2 should show an improvement on Q1, monthly ONS data (due to be updated July 14th) suggests the turn to date has been modest, in part due to strong current profits as well as positioning ahead of FCA mandated changes. This uncertainty could hold back upward earnings revisions. Lloyd’s insurers – improving outlook? Q2 should have been a better loss quarter than Q1, due to winter storm Uri. In absolute terms, we forecast the best underwriting result at Lancashire, followed by Hiscox, with Beazley having guided to H1 likely to be worse than FY21, and Conduit likely to be loss-making in its maiden period, given low earned premium. We expect pricing indices to slow, with reinsurance lines slowing more than casualty lines and property lines between the two. We expect an ongoing cautious approach to recognition of better pricing in better margins, but expect an improving trend. Low BPA volumes and margins – key Life theme. While not new news given Aviva’s Q1 update, questions remain over the timing of a recovery in BPA volumes and available margins, given very low credit spreads. Aviva has greater exposure, but Phoenix’s path to an increase in the dividend runs through higher volumes and margins, and could be called into question. Risk-free yields have pulled back. Solvency ratios are unlikely to have moved materially in Q2, after the better yield environment in Q1. Chesnara is more exposed to Sterling, but also to equity markets, than Aviva and Phoenix. Biggest cuts to Aviva forecasts. In running through our H1 forecasts, it became clear that our FY21E forecasts would be too much of a stretch given low expectations for H1. The biggest impact is in Life due to low BPA volumes and margins, but GI is also cut on lower yields, on top of which we lower for Aviva Investors, central costs and pension income. We have made smaller changes to our Phoenix profit forecasts for lower BPA volumes and margins. We also update Admiral for its H1 pre-announcement, Chesnara post FY results and Saga for a recent error in calculation of net debt. By sub-sector, we see Lloyd’s insurers trading at the greatest discounts to history, with personal lines insurers trading in the middle of recent ranges (with Admiral at a high) and Aviva having re-rated upwards on lowered earnings.
ABF ADM ASC AV/ BME BEZ DEBS CARD CSN CRE CRW DVO GAMA GRG HFD HSX JD/ KGF LRE LLOY MKS WINE NXT PHNX SBRE SAGA SDG SCS SMWH TATE WRKS WOSG SDRYN DIISF
Associated British Foods’ (ABF’s) Q3 FY21 update (16 weeks to 19 June) made for very encouraging reading, in our view, with trading ahead of management’s prior expectations, leading to raised guidance and healthy upgrades to our forecasts. On our revised forecasts, ABF is trading on a FY22F PER of 16.5x and an EV/EBITDA multiple of 7.7x. We see such valuation multiples as fundamentally undervaluing ABF with its high-quality well-invested assets, leading grocery brands and market positions, and the still immature Primark business, with its significant potential for growth across Western and Eastern Europe, the USA and potentially beyond. Forecast net cash (pre-leases) of >£1.7bn provides further support. BUY.
Upgrades at Primark and strength in food divisions ABF''s ''Q3'' results, covering March to mid-June, straddled lockdown and opening up. Better results at Primark and Sugar, as well as higher cash and lower tax, boost our FY Sep-21 EPS by 13%. More importantly, we felt the Primark performance and outlook help to address the market''s concerns about online, ESG and input pressures that we wrote about in our Summer Sizzler: fashion from head to toe. We reiterate our Outperform rating, raising our target price to 2,700p. Primark: coming back into fashion Primark delivered Q3 constant currency sales growth of 207% (Exane 189%) with like for like sales +3% higher than 2019 levels and market share gains in the UK. Although helped by pent-up demand, this demonstrates the relevance of Primark to consumers despite the market''s shift online since Covid. We think Primark is on track to earn profits of close to GBP 1bn next year, and we''re encouraged that there was no incremental caution over input pressures. Furthermore, confirmation that its new online platform will show a wider product range and list the range in specific stores is further evidence that the Oracle IT upgrade will facilitate click and collect, as we wrote about here. Another debate, Primark''s ESG, will be addressed at the investor event on 17 September. Food: tasty results Two things encouraged us. The first was that in Grocery, price increases are planned to mitigate input cost pressure which improves the profit outlook for 2022. Second, higher Sugar prices are coming through, driving an upgrade and supporting healthy profit growth next year. Outperform, target price raised to 2,700p on back of cash and earnings surprise For FY Sep-21 our EPS rises +13% driven by: higher Primark profits (H2 margin now expected to be c.9% ex furlough repayment vs FY19 12.5%, despite being largely shut for two months), higher Sugar profits, and lower tax. Net cash is GBP 200m better than expected and...
Guiding to FY22 PBT of at least £550m (Factset consensus £529m) which includes the cost of potentially repaying £25m of furlough payments received in the current year. The decision on repayment will be deferred until there is certainty on both the full lifting of COVID restrictions and the consequence of any further lockdowns over next winter. We upgrade FY22E/FY23E IFRS16 PBT by 11.1%/5.9% to £558m/£684m, reflecting guidance, with the main driver being a stronger than expected US performance. Our TP rises to 1170p (prev 1100p) reflecting the upgrades. Virtually all stores are trading now, although there continue to be some temporary closures in parts of South East Asia. The UK benefitted from pent-up demand post reopening, reacting positively to JD’s more innovative and exciting product mix. Store footfall remains fragile, though online traffic is still elevated (c.30% of sales). Sales were up double digit on 2 years ago in April/May and single digit in June. US sales have benefitted positively from a second round of Government stimulus in March and were up decent double digit on 2019. There are now 60 JD fascia stores following the opening of 5 new stores and 6 badge flips from Finish Line this year. The plan is still to do 50 Finish Line badge flips. In Europe, when stores were closed earlier in the year, sales retention was ahead of lockdown#1, ie running at 60-70% of 2019. Governance: The Board has announced its intention to split the current role of Executive Chairman and CEO before the next AGM and is looking at the Board composition in light of Hampton-Alexander and Parker Reviews. Valuation (CY22E PE 20.8x) does not reflect JD’s strong cash generation nor a material growth opportunity in our view. We expect JD to resume its exciting growth story and emerge from the pandemic with a step change in earnings helped by recent acquisitions.
ABF AVV DRX HEAD JD/ MCRO PZC WOSG
Catching up following H1 results Following AB Foods'' H1 results last week we have caught up again with management and published new forecasts, as well as 15 suggested questions for management. We lower our target price to 2500p (from 2575p): still suggesting some upside but preferring catch-up trades elsewhere. Playing catch-up on forecasts As flagged last week, the company is repaying GBP 121m of furlough support and this is the main reason for our forecast cut. However, we also take into account the ''tens of millions'' impact of corn oil costs on Grocery profits, and the new tax rate guidance. For the full year we model divisional profits of GBP 940m, including: Grocery GBP 420m, Sugar GBP 120m and Primark GBP 209m. Our Adj EPS forecast of 60p is a touch below Visible Alpha consensus of c.62.4p. Will the catch-up keep up? Heading into H2 the main swing factor is Primark, of course. On the one hand Germany and Ireland still face trading restrictions, while England has opened up strongly (we estimate +50% LFL versus 2019 levels in the first two weeks since lockdown). We assume this fades to +15% during May and then in line with 2019 for the rest of the financial year. Our monthly sales forecasts are shown inside. Bought in gross margins should be fairly flat in H2, with currency gains to follow in FY22 albeit partly tempered by freight cost rises. Not our preferred catch-up trade We model Primark to generate around GBP 1bn EBIT in FY Sep-22, despite assuming that neither sales densities nor margins fully match 2019 levels. Sugar should also make good progress, with higher UK contract prices and Vivergo start-up costs dropping away. We remain ahead of consensus for FY Sep-22 (c.146p vs Visible Alpha consensus c.136p) but with the stock trading on CY21 P/E of c.27x and CY22 P/E c.15x we maintain our Neutral rating. Our preferred re-opening pick remains Marks and Spencer (+).
ABF’s recent 2021 interim results (20th April) were a clear demonstration of the Covidinspired headwinds and tailwinds that have buffeted the Group over much of the past 12 months. Whilst most of the Food activities have prospered, the various restrictions on non-essential retail across the UK and Europe have negatively impacted Retail. Whilst the remainder of FY2021 will continue to be caught in the Covid back-wash, we look to a far more normalised FY2022 with increasing confidence, reflected in modest upgrades (Retail higher, Food lower). ABF is a high-quality business, with valuable assets and brands in the global food arena, and a very potent and still immature retail format/proposition, both supported by a very strong balance sheet. We believe a sub 18x FY2022F PER and a c8x EV/EBITDA undervalue such a high-quality stock and we reiterate our BUY rating.
SAS - The Invincibles, Associated British Foods, Grafton, Plus500, Kier, Market Highlights
ABF GFTU PLUS KIE ERICB SAND ASML BBOX RTN PINE 0HC0 0O87 SAAGF
AO World reported UK sales accelerated again in Q4, +88%, having been +67.2% in Q3 (H1: +54%). Dixons UK&I business has to date reported LfLs up 8% in P3 (with online sales +121%) having been +16% at H1 (with online sales +145%). Dixons will report pre-close sales on Wednesday 28th April. UK&I forecasts at Dixons Carphone look increasingly conservative: our estimates assume momentum slows, post P3, with LfL growth of 1.8% in H2 - implying flat to negative LfLs over the remaining weeks of H2 during Lockdown #3. Given further measures to provide more assisted selling online, with ShopLiv in place, we expect Dixons to have picked up even more online market share then it did in Lockdown #1 - when UK&I LfL sales were +4% with online sales +218%, for the 8 weeks to 27th June. Our cost assumptions this year may also prove to be too cautious as well. We assume opex falls by £47m in H2 (-9.5% YoY versus £52m, -11%YoY, in H1). Within our H2 opex forecast, we assume furlough relief of just £27m, below H1’s £38m, despite management likely to have used as much as three months of furlough in H2, versus for 7 weeks in H1 (see further details on page 19 of our note here). Upside to next year’s forecasts? We expect that, with demand pulled forward into FY21 from outer years, coupled with a tough macroeconomic backdrop, the UK&I electrical market is likely to remain subdued in FY22 and FY23. Therefore, we assume LfLs decline at UK&I by 6.5% in FY22E, before returning to growth in FY23E. However, with the business rates holiday now extended to the end of June, we think there could be as much as c. £14m of upside to our FY22E UK&I EBIT forecast. In the round: As we have previously argued, a slimmed-down Mobile business should reduce profit drag going forward, and it could even become disruptive. If Dixons can generate £1bn of FCF between FY20 and FY24, as targeted by management, the valuation is very much underpinned. Buy.
ABF BATS HSP FSJ MONY PFC RENX
Primark delivered record sales in the first week of re-opening of stores in England and Wales last week, with total footfall for the whole estate back to pre-pandemic levels. 1H’21 results were expectedly impacted by trading restrictions, with group sales down 17% yoy and operating profits down 46% yoy (-90% at Primark). With stores re-opening and liquidity remaining strong (net cash of £705m excluding lease liabilities as at the end of 1H’21), Primark has decided to repay furlough costs of £121m and reinstate an interim dividend of 6.2p. Management maintained an optimistic outlook for Primark space expansion, highlighting a strong pipeline in Europe and plans to aggressively expand in the U.S. over the next five years. In our view, the Primark proposition remains highly relevant and resonates even with today’s digitally native consumers, and we believe the upheaval in retail caused by the pandemic will provide opportunities to accelerate store openings and take market share. Reiterate BUY.
19 - 23 April 2021
ABF BAKK BREE DSCV FSTA IHP JUP MONY XPP CKN ENT KIE LIO QLT SRP AJB DOM IBST INF REL RTO RWS SGRO SXS STEM TW/ HIK SNR MYE0
One year on from the start of the pandemic and, given the numerous challenges in 2020 and difficulty with making direct comparisons given the number of lockdowns and sales/channel volatility, the BRC has presented its data on a two year, pre pandemic basis. Sales remain strong despite huge stockpiling this time last year. March 2021 saw an 8.3% increase in spending (LFL +8.4%) compared to March 2019, driven by food spend. 3 month average Food total sales were up 11.6% with LFLs up 14.7%. March last year saw panic buying and empty supermarket shelves. Social distancing started to ease towards the end of the month, together with Easter moving back into March boosting sales significantly. Non-food in-store LFL sales were down 44.4% (versus 2019) with LFLs down 44% (March LFLs excludes temporary closed stores). The pandemic has concentrated spend on home-centric categories, such as computing and home appliances. The majority of categories remain in decline, and fashion and footwear remain the hardest hit. On a year-on-year basis, Food growth slowed with 3 month average sales down 6.6%. Indoor gatherings are still banned, although there was a good spell of weather with Easter. Online non-food sales increased 94% in March versus March 2019, above the 3-month average of 90.8%. With many stores still closed, online purchases reached the highest on record, particularly for TVs, gaming consoles and laptops. Some categories like Men’s and Children’s clothing and Furniture reached triple digits growth according to the BRC. The Non-food online penetration rate increased from 43.3% in March 2020 to 59% this March. Clothing, despite being hardest hit versus 2019, did see a significant improvement year-on-year, with womenswear quickest to react ahead of more social events. Children’s clothing remains the strongest area in the category helped by back-to-school. Online penetration increased to 69.7% in March. Elsewhere, both large and small household appliances have slowed month-on-month, but remain firmly in positive territory. Computing sales fell for the first time since November 2019 y-o-y (tough comp), but are up versus 2019. Within Health & Beauty, skincare products and hand creams remain a priority, with cosmetics continuing to underperform despite increased socialising. Furniture returned to growth yoy, but this was due to a weak comp and was some way behind on a 2 year basis. Home accessories were flat on a 2 year basis, up on a 1 year basis, with textiles down on pre-pandemic levels still. DIY benefitted from a good Easter, and gaming consoles continued to perform well. Our view: COVID has been the ultimate survival test. The strong are expected to get stronger. Government support packages will provide some relief to struggling retailers until after the summer. We see scope for further upgrades and re-rating as a more ‘normalised’ environment returns and confidence increases.
ABF ASC AV/ BME DEBS CARD CSN GOOD GRG HFD JD/ KGF MKS WINE NXT PHNX SDG SCS SMWH WRKS WOSG XPP SDRYN DELRF FDRVF
Store closures (owing to Covid) at Primark led to a significant deterioration in performance over H1, but no worse than we feared and management’s outlook for H2 at Primark is ahead of our forecasts. Elsewhere the remaining business’ sales and profit growth are reported to be “ahead”. With risks receding, following the roll-out of vaccines worldwide, the valuation on 15.6x ‘steady-state’ FY23E PE is undemanding. Trading for 24 weeks to 27th February Primark: sales were down 40% (Q1: -30%) in the period, with lost sales from store closures at £1.1bn (Q1:£540m) versus previous estimates for lost sales of between £1.05bn and £1.85bn. Where stores were open, LfL sales were down 15% (Q1:-14%). As such, Primark profits are now expected to be at break-even for the half year (previous guidance was for losses of £300m - break-even) versus profits of £441m in H1 last year. Looking ahead, management expects to open 0.7m sq ft this year, having opened 0.3m sq ft in H1 and expects 83% of space to have re-opened by 26th April. As such, management now expects to lose £480m of sales in H2 and a contribution of £170m. This is a little better than our forecasts which anticipate Primark sales densities recover to 90% of FY19 levels in H2. Beyond H2, we assume sales densities return to 95% of their pre-Covid levels in FY22E, before returning back to prior levels in FY23E. Elsewhere: Grocery, Sugar, Ingredients and Agriculture have been trading “ahead” of expectations for both sales and profits, with Grocery sales +7% (Q1:+7%). For reference, Q1 sales for Ingredients were +3%, Agriculture +10%. Sugar +6% Sugar: Virus yellows disease on sugar beet means management’s forecast for UK sugar production for 2020/21 is now 0.9m tonnes down on last year's 1.19m tonnes. However, improved performance in Illovo, and higher expected sugar prices means management still expects Sugar to deliver a higher full year profit (INVe: +15%). Balance sheet: management expects the group's net cash before lease liabilities to be c.£650m at the half year versus £500m when last reported, with the difference due to working capital improving.
Non-essential retailers in England is set to open at the earliest on April 12th (stage 2) as part of UK’s 4-step roadmap to reopen the economy. This is a little later than hoped, with many retailers planning for pre-Easter (April 4th). However, it is close enough and we see little downside risk to forecasts. Easter is an important trading period for Kingfisher, the DIY players as well as Halfords, all of which can trade anyway as essential retailers. International Travel may resume from 17th May (stage 3) with the Government looking at how the isolation period could be shortened if arrivals pay for a private COVID test. Depending on other Governments’ travel restrictions, this may means summer holidays could be back on the agenda for some, which is positive for WH Smith. However, the cost of multiple private COVID tests could make international holidays unaffordable for many families and mean another staycation year. This would be positive for Halfords and UK retail generally. All limits on social contact may be removed from 21 June (Stage 4), which would mean the resumption of ‘normality’. The progressive lifting of restrictions on leisure activities starts from 12 April at the earliest, which will start to suck consumer expenditure back from retail into leisure, travel and experiences. Leisure typically accounts for c.22% of total consumer expenditure. This could quickly signal the end of the ‘super normal’ sales trends seen by the food, DIY and home exposed retailers in particular. News on the extension of furlough and the business rates holiday is likely from the Chancellor on Budget Day (3 March) and will definitely be welcomed. The rates holiday was due to finish at the end of March with furlough endingat the end of April. The Government has already announced it will respond to the consultation on potentially reforming business rates in the autumn, with talk of an online sales tax or even a warehouse tax being introduced. The Retail sector has been a vaccine beneficiary and as discussed in our note, Redrawing the landscape (15/12/2020), valuations are undemanding in our view, with forward earnings depressed by COVID. We see scope for upgrades in outer years and further re-rating. Whilst the macro backdrop is likely to deteriorate with rising unemployment and higher taxes, much of the quoted sector have sound balance sheets, with market share opportunities to go after as capacity exits, particularly in mid-market clothing and home. Retail sector always tends to favour stock-picking. We see M&S, Card Factory, Halfords, Greggs, WH Smith and Marshall Motors as excellent value/recovery Buys. We also believe the best way to make money in Retail is via roll-out stories as they are less reliant on the underlying consumer. We continue to like JD Sports, B&M, Watches of Switzerland and the online retailers. Our Sell recommendations are Kingfisher and Superdry.
ABF ASC AV/ BME DEBS CARD CNA DFCH DRX GOOD GRG HFD HSBA IBE IBE JD/ KGF MKS MCB WINE NG/ NXT OTB PNN SDG SCS SVT AMP SMWH SSE WRKS UU/ WOSG SDRYN FDRVF
The Covid-19 pandemic is causing a major shakeout of the middle ground retailer in the UK. The former Arcadia estate is now closed with most of the brands therein bought by the pure-play operators shutting 444 UK stores. Mid-market operator Debenhams’ time is also up with its c120 stores shut for business, with its online business and a number of brands purchased by Boohoo. We are witnessing a rapidly evolving structure during England’s lockdown 3.0 and those that survive will face a less crowded marketplace. In effect Covid has accelerated the prevailing structural shift online and the resulting offline fallout, as the weaker physical players start to fall away. Post lockdown, we expect there to be pent-up consumer demand noting the immediacy, social interaction and gratification for many of purchasing clothes offline. So, unlocking should provide a much-needed boost for physical retailers, with much mediocre capacity shut, perhaps most notably Marks & Spencer (M&S), Next and Primark, the former two that have also become pureplay for a period with much beneficial learning and capability. Indeed, those clothing retailers that trade-on will have a less crowded competitive landscape initially, very favourable comparatives and an opportunity to win market share over time.
ABF ASC DEBS MKS NXT SOS
Cutting full year EPS 10% to reflect lockdowns The market shrugged yesterday when AB Foods downgraded Primark expectations for the year. Having caught up with management since results we think that cost action and currencies should support a return to double-digit margins quite quickly once stores re-open. We cut FY21 EPS by c.10% to reflect the store closures and higher tax, and set out our H1 projections below. Closing out a tough Q1 Yesterday AB Foods reported on the first 16 weeks of the year, with contrasting fortunes at Primark (cFX sales -30%) compared with its food businesses (+7%). Primark''s like for like sales when stores were opened were -14%, a touch below our -10% expectation although excluding the major city centres the average of the vast majority of stores traded -10%. Today 76% of selling space remains closed. H1 expectations Guidance is for Primark to be ''broadly break-even'' in the first half: we had already assumed that lockdowns stretch into February but lower our H1 profit from c.GBP 70m to 50m. The other moving parts are Grocery profits (c.GBP210m), Sugar (c.GBP40m) and Agriculture/Ingredients (c.GBP90m). We forecast H1 EPS of 26p and a restoration of a 12.1p interim dividend. Full year estimate changes We cut our full year Sep-21 EPS from 97.7p to 88.3p (-10%). In H2 we aim off a 10% margin for Primark, but expect its full year profits to rise year on year (contrary to guidance) unless lockdowns persist in H2. In our view the brand should exit the year at this level even if sales per store remain 10% below pre-covid levels, not least because of a 10 cent yoy improvement in purchasing which flows into the final quarter. Our outer-year forecasts are not materially changed. At our target price Primark would trade on a P/E of around 16.5x based on FY19 pre-COVID profitability. Upcoming events include pre-close trading on 22 February and an ESG investor event on 1 March.
MRR and reported revenue are in-line and EBITDA loss is better than expected, implying a more sharply reduced H2 loss than expected. Broadly flat underlying opex masks a mix shift, with total R&D up materially and now c.14% of revenue while other cost segments fell year-on-year, particularly in H2. Churn remains very low and net revenue retention improved in H2 on H1 (c.115% vs 110%). After a neutral H1, working capital swung back to be positive in H2, as background sales momentum accelerated. Our forecasts for revenue and EBITDA are unchanged. For FY20, entry ARR ended up covering c.90% of total revenue for a COVID-affected year (c.£127m versus £141m). Entry ARR for FY21E is c.£154m, implying a similar ratio of coverage, i.e. c.90% versus the bottom end of the new revenue guidance range (c.£170m-£180m). This looks conservative given there should be some degree of acceleration this year. EBITDA loss also looks conservative versus the H2/20 run-rate. Even allowing for rising travel and marketing costs, achieving cash breakeven later in FY21E or in FY22E – at the operating level on a run-rate basis – does not appear a stretch. Alongside results, new NED announcements add a wealth of experience gained at Google, Tibco and VMWare in scaling and managing technology businesses in the US and globally, which should be viewed as positive. The Bessemer Nasdaq Emerging Cloud Index currently sits at c.15x NTM EV/revenue for c.28% NTM revenue growth and c.74% gross margins, all on a median basis. Despite the recent share price rise, PRSM’s multiple still sits at a >20% discount, albeit for marginally lower revenue growth, but superior gross margin. Press reports of a potential IPO of UiPath in 2021, together with a possible US listing for PRSM, could act as positive catalysts. Our new TP of 2200p reflects a FY21E EV/Sales c.10% discount to the BVP index (c.13.6x).
ABF BIFF PRSM DEBS CARD CNA CLIN DPH HFD HAS HUR LAM PAGE RWA SAFE XAR
COVID has been the ultimate survival test. While industry profitability generally has been blown apart in 2020, tight cash control and subsequent performance delivered post the first lockdown are testament to the strength and adaptability of many businesses. Like the financial crisis, the strong are likely to emerge even stronger. Actions taken and investments made now, with digitalisation projects expected to be prioritised, are likely to determine future performance for years to come. 2021 is expected to be equally as challenging with demand unlikely to get back to pre-pandemic levels. A deteriorating macroeconomic backdrop with rising unemployment and higher taxes is expected to impact consumer sentiment and demand. Short-term visibility remains poor. Underlying demand will be hard to gauge given Brexit, the ongoing impact of COVID-19 and the challenge of easy, or difficult, comparables from mid-March onwards. It is difficult to assess how much of the elevated demand for some players is permanent market share gain or demand pulled forward. Consumer spending is likely to shift back towards leisure, travel and experiences. Market share opportunities arise as capacity exits. Many high profile names have gone into administration or through CVAs. The fallout from Debenhams, Arcadia and Edinburgh Wool Mill Group could dramatically change the flow of many shopping centres/High Streets permanently. Landlords may need to repurpose this space as few retailers are signing new leases. Restructuring and right-sizing store portfolios will be an ongoing theme as retailers look to optimise their store portfolios, given the accelerated shift online. Online penetration is expect to settle in the high 30s/low 40s percentage penetration post COVID as restrictions lift. Agility, flexibility and innovation have been vital. Sector valuations are undemanding as forward earnings are still depressed by COVID. While short-term share price performance is likely to be driven by the course of the pandemic and easing of restrictions, we see scope for a further re-rating and upgrades as a more ‘normalised’ environment returns and confidence increases in the sector. Retail sector always tends to favour stock-picking rather than ‘buying the basket’. The rotation into value post the Pfizer vaccine news makes picking the winners more challenging in 2021 given there are material valuation anomalies in the sector. We see M&S, Card Factory, Halfords, Greggs, WH Smith and Marshall Motors as excellent value/recovery Buys. We traditionally believe the best way to make money in Retail is via roll-out stories as they are less reliant on the underlying consumer for growth. We continue to favour JD Sports, B&M, Watches of Switzerland and the online retailers where there is upgrade potential. Our Sell recommendations are Kingfisher and Superdry.
ABF ASC BME DEBS CARD GRG HFD JD/ KGF MKS WINE NXT SDG SCS SMWH WRKS WOSG SDRYN
In or view, there are two key decarbonisation themes that will engage most of the major miners through the coming decades: Energy transition: the pathway toward transformation of the global energy sector from fossil-based to zero-carbon or carbon neutrality, and Decarbonisation of the steel and non-ferrous metal industries: technological developments aimed at limiting the global greenhouse gas emissions generated by the steel and base metal making industries. Increased electrification is at the very heart of the energy transition, allied with the shift away from fossil fuel power generation towards renewable energy sources. This should see increased demand for essential commodities, the “transition metals” – copper, aluminium, nickel, cobalt, and lithium – across all elements of the power value chain: generation (wind turbines, solar panels), transmission and distribution (grids, charging infrastructure), storage (batteries) and application (electric vehicles). At the same time, commodities most associated with the status quo – fossil fuels, lead – stand to be progressively displaced, while PGMs face mixed outcomes. The intensity of changing demand for these commodities, and the ability of the mining industry to respond, will depend heavily on the decarbonisation pathways that governments and the private sector adopt and the rigour with which they implement them through inducement and penalties. Increased decarbonisation of the steel and non-ferrous metal industries meanwhile can simply take place through the greater use of renewable power, higher quality feedstocks (high-grade iron ore, premium metallurgical coal, trihydrate bauxite and alumina), increased scrap and increased adoption of EAF in steel making. Ultimately, however, a material reduction in carbon emissions is only likely to come through material advances in the processes and economics underpinning technologies that are still new to the sector, including carbon and fluorine gas capture, utilisation and storage (CCUS), and blast furnace hydrogen injection (ideally using green hydrogen). This note is intended to form the basis for later, more detailed, reports on the individual commodities and themes identified here and the ramifications these have for the miners. Tentative steps. The miners have made consistent progress in setting and meeting targets that reduce their impact, largely through asset divestments. Growth in “future facing” commodities remains modest, however, given limited options and risk aversion towards substantial capital investments/M&A. While financial commitment to climate change initiatives is increasing, it remains tentative given the nascent nature of many of the related technologies.
ABF ADM AAL ANTO AV/ BME BEZ BHP CEY FXPO GLEN HSX LRE MCB RSG RIO SBRE SSE CELTF BTVCF DIISF
Unprecedented moves: Yesterday’s news from Pfizer of successful vaccine clinical trials data caused one of the most dramatic market moves in the work life of the Media team (which dates back to in 2004). Whilst the reactions of the likes of Informa, On The Beach, Cineworld & Restaurant Group (alongside the more negative reactions of perceived ‘crisis winners’) were hardly surprising in terms of direction relative to our previously expressed expectations, the quantum and speed of the moves were. It is outside of our expertise to opine on regulatory timeframes & roll-out schedules, but, if successful, vaccine development does allow a momentary fleeting glimpse of a potential return to at least partial normality long-term. It is therefore worth considering where companies across the two sectors stand in terms of valuations and earnings forecasts, relative to pre-crisis levels. Running the numbers: In the graphics overleaf (see full report) we highlight 3 screens across the sectors. 1) The multiple differential between current fiscal FY22E PE post yesterday, relative to the average prospective (NTM) PE over 2019, 2) the differential between our fiscal FY22E EPS forecast and the FY19 EPS, and 3) the implied share price based on FY19 EPS and the average prospective PE during 2019, relative to the closing price yesterday. We recognise the crude mechanical nature of this, given distortions from equity raising, portfolio change and structural growth, but it does still highlight some interesting points to consider, in our view More to go for: From a pure multiple standpoint, excluding Cineworld which is still impacted by liquidity concerns, the likes of Moneysupermarket, GoCo and Euromoney all still offer scope for multiple recovery relative to FY19. From an earnings perspective - although Restaurant Group is impacted by the reduced estate post CVA and it, as well as Informa and JD Wetherspoon, raised equity, these three plus Cineworld and Euromoney still all have forecast EPS well below FY19 levels. Lastly, combining FY19 EPS and average prospective PE during 2019 to give an implied share price highlights significant implied upside for Informa, Euromoney and Moneysupermarket (in the Media sector) and Cineworld, Restaurant Group & JD Wetherspoon (in Leisure sector).
ABF ASC AUTO BME BARC BMY DEBS CARD DOM ERM FDEV FUTR GLV GRG HFD IMB INF JD/ KGF MKS MGGT MONY WINE NXT OTB OXIG PFD REL RTN RMV SCS SMWH EVPL WRKS WOSG JDW DQ6 SDRYN SNKSY DIISF
October was another strong month, with tightening COVID restrictions across the UK prompting some stocking up. There was a Halloween uptick and another month with good food, gifts and loungewear sales. October’s UK Retail sales increased by 4.9%, a slight slowdown on September’s +5.6%, with LFLs up 5.2%. LFLs exclude temporary closed stores, but include online. Food 3-month average sales were up 5.8%, with LFLs +5.2%. Non-food 3-month average sales were up 4.0%, with LFLs +5.7%. For the month of October, both categories were in growth. Performance between online and in-store non-food channels widened, with the highest online penetration since June. Non-food store sales were down 9%, a fall back from September’s -3.7% as the second wave started to pick up. Non-food online sales were up 39%, with penetration at 42.3% (LY 31.7%). There continues to be a wide performance gap between the winners and the losers depending on location, channel and product category. Demand for food, home-related items like furniture (slowing growth rate) and technology remained strong as those in a job continue to spend. There was a mid-month lull in trade, according to the BRC, suggesting an increasing number of cash-strapped consumers as well. The underperforming categories were clothing and footwear, with comfort wear in fashion and more formalwear suffering. Womenswear remains the worst performing category. Events have overtaken and will overshadow October’s numbers, with the focus now on the second English lockdown and how damaging it will be to the key and most profitable Christmas trading period. With consumers having to switch online, not all retailers will benefit and there are likely to be online capacity constraints for some given this switch is on top of peak online volume demand anyway with Black Friday at the end of the month. The lockdown will put severe pressure on the final weeks assuming shops are allowed to reopen.
ABF ASC BME DEBS CARD GRG HFD JD/ KGF MKS MMH WINE NXT SCS SMWH WRKS WOSG SDRYN
Huge value/growth shift in the sector yesterday on the positive news from the Pfizer/BioNTech COVID vaccine trial, which shows where future sector outperformance may come from over the next 6-12 months. While 7 stocks in our universe were up by double digits yesterday, there is still material potential upside as these share prices are down between 21%-76% YTD (see Figure 2). Vaccine relative outperformers were those most impacted by the pandemic to date, namely WH Smith (Travel/High Street exposure), Greggs (Food to go), Card Factory (High Street), and the more physically exposed clothing retailers such as AB Foods via Primark and M&S. Those sold off were the pure play online players, which have benefitted from the acceleration in the structural shift online, and those ‘stay at home’ stocks, helped by the switch to spending on the home from leisure, such as Kingfisher, B&M, and Dunelm. B&M benefitted from its status as an essential retailer, though good momentum has continued suggesting it may have permanently grown its market share and customer base. While the structural shift online is not going to reverse, we believe DIY and homeware might struggle next year given the tough comparables and a switch back in consumer spending to leisure and experiences, e.g. holidays. Retail still needs to get through Christmas, the fourth stage to survival as discussed in Four hurdles to survival (10/6/20) with a second UK lockdown adding to the challenge (see Will Christmas be cancelled? 2/11/20) and uncertainty. Then there is the possibility of a hard Brexit adding to the pressure. 2021 is expected to be equally as challenging for Retail with demand unlikely to return to pre-pandemic levels (2019 levels). Firstly, the roll-out of a successful vaccine will take time and so ‘normality’ is unlikely to return quickly. Secondly, we expect a deteriorating macro environment as the inevitable rise in unemployment weighs heavily on consumer sentiment and demand. Actions taken and investments made now by companies are likely to define future performance for years to come with technology investment needed to increase agility and help tackle long-term structural pressures. The Retail sector is likely to be seen as more investible if there is a successful vaccine and indeed a Brexit deal. The more attractive value plays in the sector are Card Factory, TheWorks.co.uk, WH Smith and Greggs, in our view, assuming a vaccination programme starts next year. We expect M&S to emerge in a better market position and could see a strong rebound in its clothing business. We continue to like the more consistent, proven growth stories like JD Sports, Watches of Switzerland and B&M where there is upside risk to forecasts. Our Sell recommendations are Kingfisher and Superdry.
Feeding lockdown 2.0 into the model AB Foods reported slightly better than expected FY Sep-20 earnings, to go with stronger cashflow reported yesterday. It is the new wave of lockdowns that matter, however, and today is mainly about factoring in the earnings cut from Primark store closures. Not such a sweet outlook for FY-21 Lockdown 2.0, which by later this week will mean that almost 60% of Primark''s selling space is once again closed, is guided to reduce revenues by GBP 375m. We estimate that these stores will make losses of GBP 90m during closure, although accessing furlough schemes could soften the impact. There are also likely to be fewer Grocery tailwinds ahead, with Twining''s cost savings already landed, risks around supermarket discounting, and a likely adverse mix back to food service. Addressing the medium term questions Many factors demonstrate the strength of Primark''s model when its shops can open: its strong trading since the end of the first lockdown (in many locations flat or higher sales than last year); maintained market share despite the industry''s shift online; its impressive fourth quarter margin (c.9.0%); its continued social media engagement levels; improved momentum in Germany as it adjusts store size and sustainability messaging; and its development of growth avenues in the US and Poland. Until prompted in QandA, management did not mention online but the roll-out of click and collect-enabled till points does suggest trials could be possible in the coming year or two. A Christmas jumper? AB Foods shares have weakened as a second lockdown has become reality. We cut our Sep-21 Adj EPS forecasts by 15% to c.107p (consensus prior to today c.120p) but clearly there is downside risk if these lockdowns extend. We cut our target price to 1,950p, assuming a long term Primark margin of 9%. This offers upside, particularly if trading is able to resume throughout December, but we prefer stocks elsewhere in the sector where...
A second English lockdown is due to start on Thursday 5 November, resulting in all non-essential store-based retailers having to close stores again for a month until 3 December. Stores are already closed in Wales, with its 17 day firebreak due to end on 9 November. In Scotland and Northern Ireland, most Retail is currently open. Hit to profits from closure could be higher for some the second time round, given shutdown coincides with the critical, much more profitable pre-Christmas trading period. However, the industry is better prepared operationally for a switch to online with social distancing already in place in distribution centres. We do not expect demand to collapse in the initial weeks as seen in the first lockdown; we expect consumers to adapt more seamlessly having been through the experience once already. We are looking for demand to fall off between 40% & 60% with higher basket size partially mitigating lower footfall. The extension of the furlough scheme for another month will be welcomed as it is more generous than the proposed Job Support Scheme. It should help reduce cash burn to below the levels seen last time. The cost of switching to online should be lower (having incurred some of these costs last time) and most retailers are likely to have a greater proportion of their portfolio open, with Scotland and many other countries still allowing stores to open. Investor should focus on liquidity, cash burn and financial headroom. Most retailers should be just passed their peak working capital, though another working capital unwind could prove unhelpful. Balance sheets are typically in better shape with most companies having extended debt facilities and/or already accessed the capital market the first time round. Christmas is in danger of being a write-off for those retailers more reliant on trade in the 6 week run-up to Christmas, with no certainty non-essential retailers will be able to reopen on December 4th. Given the more ‘last minute’ nature of their Christmas trading patterns, we believe Card Factory, TheWorks, and WH Smith could be more challenged in processing volumes, though we see this already more than reflected in the depressed valuations of the first two names. We expect clothing retailers to continue to have a tough time, with Superdry notably vulnerable, in our view, given its historic trading bias to Christmas. Beneficiaries of lockdown are likely to be essential retailers, such as B&M, and the online retailers, whose business models are unaffected. We would also expect retailers like Watches of Switzerland and JD Sports to be relative winners given the strong demand for their respective product categories.
Q4 highlights sustained recovery at Primark, with footfall and purchase frequency improving. UK LfL sales (since reopening) are now expected to be -12% and -5%, excluding destination city-centre stores. As such, Primark has achieved its highest ever volume and value share in the last four weeks (for all UK clothing retail sales), meaning the perceived threat from an ongoing structural shift towards consumers using online channels (as opposed to stores) to buy clothing, may be overdone. Elsewhere, Europe LfLs sales since reopening are expected to be -17% (or -13% ex “destination stores”) and in the US -9% (or -2% ex destination stores). Gross margin outlook improves (at Primark) with reduced levels of seasonal inventory expected to be carried over into next year, following the better-than-expected sell-through rate in H2. Encouragingly, we also believe the EBIT margin (at Primark) achieved on sales since re-opening stores has been close to 8% (FY19 IFRS 16 EBIT margin: 12.5%), implying our expectation for EBIT margins to return to 9% in FY21E and 11% in FY22E is conservative (see comment on forecasts below). EU sugar prices are likely to be supported by difficult weather conditions and lower yields (due to virus yellows disease), thus we expect profits next year across the sugar business to continue to improve. The remaining businesses should continue to see further progress. Forecasts changes: We update our forecasts, bringing us closer into line with consensus for this year. Our IFRS 16 PBT forecasts for this year increase by +26%, while our EPS forecasts increase to a lesser degree, by 14%, owing to a higher assumed tax rate. However, our outer year forecasts remain broadly unchanged and assume that Primark sales return to FY19 levels by FY22E. Our DCF-derived target price increases to 2070p.
ABF FUTR HUR RI RI
BRC retail sales for August up 3.9%, the highest growth rate since May 2018 excluding Easter distortions, with LFL +4.7%. Note that LFL sales exclude temporary closed stores, but include online. The recovery continues when compared to the three-month average of +3.5% and the six-month average of down 2.9%, which includes the entire COVID-19 period. Non-food sales over the last three months were up 1.4% (LFL +7.7%), finally returning to growth, with the Food three-month average sales up 5.9% (LFL +6.3%), beginning to return to more normal levels as spending shifts back to leisure helped by the Government’s Eat Out to Help Out scheme. Adjusting for food price inflation, volume growth averaged 4.5% yoy over the last 3 months. Wide divergence in channel performance with in-store non-food LFL down 17.8% (LFL down 8.5%), impacted by weak footfall and online sales up 42.4% to penetration of 39.3%. Online saw a slight uptick after a slowing trend over the last 2 months. Strong sales in home goods, computing, furniture, TVs and food continued to be helped by remote working. Large ticket items are definitely benefiting from lockdown savings with the bigger players also benefitting from market consolidation. Clothing, footwear and beauty categories are still struggling, though fashion has rebounded more strongly online. Formal and occasion wear, together with high fashion, continue to suffer. Colder weather towards the end of the month helped the back-to-school period with kidswear almost in growth. Beauty continues to struggle more than health. As the weather turned more autumnal, there was a drop off in demand for sporting goods and DIY. While industry trading appears to be normalising, it feels like the calm before the storm in our view. We expect the Golden Quarter into Christmas to be challenging for the industry, with it unclear how much demand has been bought forward by the ‘lockdown windfall’. The path of the pandemic is unknown with local lockdowns increasing. The economic outlook is deteriorating as unemployment rises ahead of furlough finishing at the end of October. In addition, there is September’s quarterly rent payment day. We continue to prefer the more consistent and proven growth stories like JD Sports, Watches of Switzerland, B&M, with our pure-play favourite being ASOS. Our value plays are Halfords and Card Factory.
Trading in Q4 has exceeded management expectations across all businesses, with Primark achieving its highest ever value and volume shares for this time of year in the latest four weeks. As such, Primark EBIT for the year is now expected to be towards the higher end of the £300m-£350m range guided to at Q3 (consensus: £345m) and net cash will be £1.3bn (Q3 guidance: £750m), predominately driven by lower inventory levels in the Primark business improving the group’s working capital position. The RCF has now been extended out to July 2023, having been full paid in August. As expected, profits in the Sugar, Grocery, Agriculture and Ingredients businesses are expected to be ahead over last year, with particular strong increases in Sugar and Agriculture. View The shares trade on 16.8x consensus FY21 PE, in line with its historical average. Whilst recovery feels underpinned in the Primark business (for now), the valuation to us remains demanding with better value available elsewhere. Business division performances Sugar revenues and profits are expected to be “ahead” given sugar prices have already been contracted in H2 in the European businesses. World Sugar prices have also since improved following the sharp decline in April. Management has therefore been able to contract sales for next year in line with expectations in the UK and Spanish businesses. Profits in Grocery are expected to be significantly ahead, driven by strong demand in H2 and volume-driven margin gains. Specifically at Primark, cumulative sales since re-opening stores (in May) at Primark are expected to be £2bn (we estimate average monthly sales last year were c. £694m per month) which implies cumulative sales are expected to be down c. 15%, having been -12% for the 7-week period to 20th June reported at Q3. Sales in destination city centre stores remain softest and account for 13% of sales pre-COVID, but footfall in OOT stores has been improving and ABV remains robust. Therefore, since re-opening stores in May, LfL sales in the UK are expected to be -12% and -5% if destination city-centre stores are excluded. Europe LfLs are expected to be -17% (or -13% ex. “destination stores”), US -9% (or -2% ex. destination stores). Earlier-than-expected reopening of the stores and stronger-than-expected trading over the summer have resulted in lower inventory levels. Therefore, the book value of spring/summer inventory that will be carried into next year is now expected to be only some £150m, and total year-end inventory levels will be much lower. Since re-opening stores in May, LfL
Acquiring HFO brings a high quality channel-driven SIP trunking and cloud PBX asset (c.70% of EBITDA) that represents an initial move into Germany, Europe’s largest business telecoms market. Alongside this comes a low margin, but established mobile distribution business. Broadly similar to Gamma’s makeup several years ago, we see the IP telephony unit as high growth (i.e. double-digit) / high margin, and the mobile unit as having a flat to declining profile. Compared to published 2019 financials, COVID-19 has probably accelerated these unit profiles. Our forecasts move to assume a six month contribution in 2020E with broadly flat EBITDA assumed in H2/20E and 2021E on 2019. After some extra depreciation, amortisation, tax and a small minority interest (reflecting initial 80% ownership) EPS accretion is c.1% in 2020E and 2% for 2021E. Ultimately, HFO has been acquired to grow significantly, and should benefit from rising margins through mix effect. However, given wider economic uncertainties, pushing the boat out on assumptions at this stage does not feel sensible. At first glance, the range of potential total consideration implies a trailing EV/EBITDA multiple of 10–13x. Stretch targets triggering full pay-out are not disclosed, but we assume also broadly correlate to paying a 10x EBITDA multiple, i.e. implying substantive growth in IP telephony EBITDA. With net cash of £37.7m ending H1/20 and initial consideration plus assumed debt of c.£21m, a healthy surplus cash balance is retained at all times. Taking into account acquisition consideration in H1 (Exactive, Voz Telecom, Nimsys) and the dividend, the disclosed net cash figure implies healthy H1 FCF generation. We reiterate Buy and retain our TP. On top of resilient UK performance, a significant part of the long term strategy has now been at least partially executed; in establishing a pan-European asset with potential to layer on incremental growth from rising IP telephony penetration as a secular trend.
ABF AVON BARC SMDS GAMA LLOY MGGT
ABF has issued a reassuring Q3 2020 update in our view, in the face of what are unprecedented times across the globe. With >98% of retail selling space now open, we view a 12% decline in LFL as a solid outturn, given we remain in the early phase of lockdown easing, which bodes well for FY2021 and beyond. Across its food related activities (ex-Sugar), we are encouraged that profitability was “well ahead” in the quarter and that Sugar will be materially up over the year, despite being below start of year expectations. We view ABF as an attractive mix of high quality/valuable brands, well invested global processing assets and a still potent and immature Primark business. Trading on an FY2021 PER of 17.4x and an EV/EBITDA multiple of 8.3x (on reissued forecasts), we reiterate our BUY recommendation.
The industry has been in survival mode since lockdown with the no.1 priority being cash preservation and boosting liquidity via increasing banking facilities, accessing the equity markets (7 retailers to date) and sale & leaseback deals. Landlords and suppliers have taken much of the pain. If it were not for UK Government support, many more retailers would have likely gone into administration. We still see three critical hurdles to come in 2020. Stage 2 of survival will be reopening stores from 15th June. Predicting how quickly sales might come back is extremely difficult. The challenge will be balancing costs & cash with sales, and how many staff to take off furlough. Stage 3 of survival will be at the end of October when the Job Retention scheme is due to end. The timing is far from ideal as it coincides with peak working capital for most retailers with stock levels at their highest ahead of the all-important Christmas trading period. Cash will need to be tightly controlled with decisions to be made on short-term staffing levels. Stage 4 of survival is delivering Christmas. Most retailers will be hoping the UK will have moved to a 1 metre social distancing rule by December. Otherwise, for many retailers, Christmas trading will be impacted with shops unable to process the usual volumes. 2021 is expected to be equally as challenging with demand likely to struggle to return to pre-pandemic levels (2019 levels), as we expect a rise in unemployment to weigh heavily on sentiment and demand. Increased investment in technology will be needed to make businesses more agile as well as help address the longer-term structural challenges already facing the industry before Covid-19. These are expected to have accelerated. ‘Never let a good crisis go to waste’. Actions taken and investments made by management teams now are likely to define future performance for years to come. We disagree with those who say retail will change forever as a result of the pandemic. Retail is in a constant state of evolution. As discussed in February’s sector note, The only constant is change, the attributes which make a successful retailer in our mind have stood the test of time – understanding the customer and remaining relevant by creating a differentiated and inspiring offer. What has changed is the method of delivery and how demanding consumers have become. The sector remains oversold, in our view. We continue to prefer the more consistent, proven growth stories like B&M, Greggs, JD Sports, Watches of Switzerland and WH Smith for the longer term. In the pure play space, we prefer ASOS over boohoo for now.
ABF AMS ASC BME DEBS CARD GRG GMS HFD JD/ KGF LRE MKS WINE NXT OSB PAG RTN SCS SMWH WRKS WOSG SDRYN
May saw an improvement in both food and non-food trading versus April, though it was still another very testing and challenging month under lockdown for non-food retailers in particular. Figure 1 overleaf shows the weekly sales trend and scale of the recovery in May versus the lows when lockdown begun. Total retail sales decreased 5.9% (April down 19.1%) against a weak May last year, with LFL sales excluding temporary closed stores up 7.9%. Wide divergences in performance continues. Food 3-month average sales were up 5.6% with LFL up 8.7%. May’s Food sales were up yoy benefiting from sunshine, picnics, the slight easing of social distancing and sales switching from the restaurants & pub channels which remained closed. Non-food 3-month average sales decreased 21.8%, with LFL down 2.1%; May non-food sales were down yoy driven by clothing and furniture. Weak non-food performance was due to in-store sales which declined 50% (LFL -22% ex closed stores) over the 3 months to May. In May, in-store non-food LFL sales were still down by double digits. Stores remain in double-digit decline in all categories, though encouragingly all category performed better in May versus April. Online non-food sales were up 60% in May with penetration increasing to 62% versus 31% last year. The stronger performing non-food product categories were again office supplies/computing, fitness equipment and bicycles as well as DIY boosted by the opening of garden centres and anything kids’ entertainment related. Home accessories held up relatively well together with small domestic appliances. Clothing & Footwear remained in the bottom 3 worst performing categories together with jewellery. Furniture also struggled. Health & Beauty saw destocking in health-related categories with beauty still struggling. Eyes now focused on 15th June when all remaining non-essential stores reopen, though weak consumer confidence and social distancing are expected to hold back sales. The challenge will be managing costs and cash versus sales. The sector rebounded 14% over the last month versus the market up 9.5%. The strong tend to emerge stronger post a crisis and we continue to prefer the more consistent, proven growth stories like B&M, JD Sports, Greggs, Watches of Switzerland and WH Smith for the longer term. In the pure play space, we prefer ASOS over boohoo now.
ABF ASC AVV BME DEBS BATS CARD GRG HFD JD/ KGF MKS MTRO WINE NXT OSB OXIG PAG SCS SMWH WRKS WOSG SDRYN NBRNF
ABF ASC BME DEBS CARD GRG HFD JD/ KGF MKS MMH WINE NXT SCS SMWH WRKS WOSG SDRYN NBRNF
1H20 EBITDA broadly in-line with expectations, though COVID materially impacted the last 3 weeks. Group adjusted 1H20 EBITDA grew 2.4% to £21.6m (INVe £22.5m). This compares to centre EBITDA +18.9% in the 5 months to the end of February pre COVID. Sales momentum was strong pre lockdown (1H20 LFL revenues +8.6%), benefitting from the extension of its dynamic pricing system, enhanced amusement offer & improved digit channel. June quarter rent negotiations has reduced average cash burn to £1.2m a month during store closure versus £1.6m at the time of the capital raising in April. This helps cashflow by c.£1.6m over the closure period. Downgrading FY20E/FY21E EBITDA by 39%/16%. We now assume centres reopen July (prev June) & that strict social distancing continues to December. Our TP, based on a mid-teens FY22E PE, falls to 215p, from 225p. Going concern scenario shows BOWL can run at 20% of last year’s trade and have sufficient liquidity for the next 12 months. A total revenue loss for 1-5 months beyond 1 June has been modelled by the company & continued decline in revenues versus its ‘normal’ expectations thereafter (see page 3 of full report). A comprehensive reopening strategy ready. Centres will reopen with every other lane open, and more space between bar/dining tables and in the amusement area. Pre-booking will be required at the busiest centres at peak times (Friday evening to Sunday) when capacity utilisation is c.70% vs av capacity in the high 30s. Valuation looks undemanding (FY22E PE of 13.8x) for a highly returns, cash generative growth story. In our view, COVID-19 does not impact BOWL’s longer term potential with good medium term visibility on its new project pipeline. We believe sales should recover relatively quickly given its family and value orientated proposition. We reiterate our BUY.
ABF BOWL IWG MKS MMH QQ/ RTN STAN DELRF
Re-opening of stores Since May, Primark has opened 30% of its space, predominately across Europe. UK stores will now open on 15th June bringing total space opened to 74% of the estate. The balance of stores will open thereafter in late June. Management also plans to open 3 new stores on 15th June. Trading performance Since closing stores, management has been able to cut overhead costs below the 50% reduction to which it had initially guided, owing to renegotiations with landlords. Performance of stores that have been opened since May has been mixed, but in aggregate sales are down. However, encouragingly, a number of stores (since opening) have seen sales actually ahead, but four stores have seen sales down by as much as 50% - these were predominately stores located in high tourism areas. Outlook/Valuation Management expects that social distancing measures will impact maximum footfall at peak for stores with average to higher- than-average sales densities. Higher-than-average sales density stores account for 10% to 20% of the estate. In the meantime, elevated inventory levels remain an issue (with £1.5bn of stock on hand and £0.4bn commitments to suppliers). Management is optimistic that it will be able to sell the continuity/non seasonal lines (which make up the bulk of the stock on hand) throughout the year. Management also believes it can sell Spring/Summer-20 lines next year, meaning markdown is unlikely to be excessive. On this point, we are more cautious and continue to expect that there will be significant gross margin dilution in H2. See our end April ABF note: Climbing up an overhang Elsewhere, management continues to expect operating profits for the remaining businesses to be in line with previous expectations For us, however, the valuation still remains unappealing on an FY21E PE of 15.2x. HOLD retained.
April’s total retail sales down 19.1% yoy, with LFL sales up 5.7% on a LFL basis as the BRC has measured LFL sales excluding temporary closed stores. Overall, this is the worst decline since the BRC started monitoring sales. This was driven by non-food where the non-food 3 month average sales were down 17.5% versus a 12 month average decline of 11.5%. Food 3 month average sales were up 4.5% (LFL +6%) versus a 12 month average of 1.6%. Non-food store closures drove the decline, with 3 month average in-store sales down 17.3% with online non-food sales up 57.9% (12 month average +8.5%). The pain was not felt equally, with’ essential’ retailers, like Halfords, B&M and B&Q, seeing some store sales and those better positioned online, like Amazon, Argos and boohoo, benefiting. Fashion non-food categories were worse hit, particularly clothing, footwear, jewellery & large household items, not helped by 2-man delivery restriction. Health & Beauty also suffered from deserted High Streets, though demand for antibacterial products stayed high. Within clothing, demand was strong for athleisure/loungewear and nightwear. Demand for high fashion disappeared. Childrenwear declined the least. The only non-food categories where sales increased were computing and toys/baby equipment. Non-food categories which benefitted particularly online were games consoles, bikes, office equipment and haberdashery. DIY, cushions, throw and small decorative items for the home saw good demand. Promotional activity reduced in March. Many retailers protected their logistics operations from overloading by removing promotions/marketing. Food sales were disappointing, according to the BRC, with lockdown turning Easter into a more modest affair, though it was a busy month for building capacity on-line and adapting stores to social distancing. Food sales would also have benefitted from closures of pubs and restaurants. Lockdown is certainly likely to have speeded up the longer term structural shift online, as consumers have adapted and change the way they shop. Short term, companies have focused on cash and cost preservation. There are likely to be material economic and financial headwinds as the industry emerges from lockdown with higher unemployment and weak demand as well as the challenge/cost of implementing social distancing within its operations. The strong usually get stronger in a downturn, while restructuring/recovery plays tend to be set back a year or so as they typically emerge with more debt and reduced ability to invest. While sector valuations generally appear cheap, we prefer the more consistent, proven growth stories like B&M, JD Sports, Greggs, Watches of Switzerland and WH Smith for the longer term.
ABF ASC AUTO BME DEBS CARD GRG HFD JD/ KGF LAM MKS WINE NXT RMV SGE SCS SMWH WRKS ULE VSVS WOSG 0TY SDRYN NBRNF
H1 PBT was broadly in line with consensus, up +3% cc (YoY), while Primark performance was solid at -1% cc YoY, with margins ahead of expectations and Europe and US continuing to see strong growth. Trading in Germany has seen further improvement as well. However, Primark’s inventory positon is a concern, having recently purchased £0.6bn of stock in transit ahead of the stores closing. Management remains confident that the majority of this inventory can be cleared through the natural course of business, however we think some extra clearance on seasonal lines will be required which could lead to significant gross margin dilution in H2. Elsewhere our expected H2 recovery in sugar remains unchanged with sugar prices already contracted in, thus we continue to expect full-year profits of £120m. The Grocery business is now performing well with EBIT +12%. As such, management expectations for the Sugar, Grocery, Ingredients and Agriculture business in H2 are unchanged. Banking and facilities: Cash burn has been high in recent weeks (over £300m since February) owing to working capital unwind, but management expects cash burn to fall to £100m a month by June as receipts from the UK government’s Coronavirus Job Retention Scheme are reimbursed. With net cash total facilities of £1.5bn and potential access to CCFF funds, we believe liquidity is unlikely to be an issue for now. Valuation & forecasts: We cut FY20E PBT by 51%, predominately driven by downgrades in Primark where we now expect full-year sales to be down 23%. We expect gross margins to be down significantly in H2, leading to full-year IFRS 16 EBIT margins of just 3.2%. We assume no dividend in FY20E. On 15.5x FY21E PE, the valuation remains in line with its historic average. HOLD.
ABF ADM AV/ BARC BEZ DIA HSX IMB LRE NXT RSG SBRE SAGA SEPL STAN DIISF
An oil crisis like no other… The current collapse of the oil sector is unprecedented in its scale and rapidity, with the loss of all restraint from the OPEC+ producing countries almost simultaneously followed by the collapse in demand as the world went into economic lockdown in an attempt to limit the surge in the global pandemic. This is an oil price crisis unlike any other seen in the last 50 years in its severity, but one we think is fixable. Despite the fact we expect lower prices in the short term, there is a road to recovery and note that we only slightly reduce our long-term Brent estimate from $60/bbl to $55/bbl. Can E&P regain investor appetite? Many investors will have sold their oil holdings over the recent weeks as markets collapsed, and they will be reluctant to rebuild them even if oil prices recover sharply. ESG pressures remain, the cash withdrawn recently from oil investments may well be redeployed in energy companies which offer a more sustainable path to CO2 reduction than the traditional E&Ps. Although most of the companies we cover now have carbon reduction and offset ambitions and strategies, this may not be enough to ensure they remain credible long-term investments for some market participants. Safety first – Our investment strategy in these uncertain times is to focus on those companies with the strongest balance sheets and the best assets, rather than looking for higher-risk plays which appear ‘cheap’ at current share prices. Our top picks are now: Diversified, Lundin & Seplat. All three have robust balance sheets, can fund growth and, importantly, have low-cost assets that can weather the storm and still fund a dividend. Although the highly levered plays may look superficially cheap, we believe the looming debt piles will continue to mount pressure even as the oil price slowly recovers, and threat of bankruptcy grows by the day at current levels. We downgrade Kosmos and Premier to Hold. What is to come? 1) Consolidation – We expect there may be some internal consolidation in the sector, with some of the stronger companies merging with their weaker peers. The key issue will be the ability of the enlarged companies to manage the debt burdens which these deals will produce at a time when the oil price outlook remains uncertain. 2) Massive cost-cutting / Project deferrals – Cost reductions are already underway, with deferral of capex the key parameter. We do highlight that companies remain in better health this time around, with lower committed capex and fewer capital intensive developments on their books. 3) Significant refinancing – We believe it will be hard to convince investors to subscribe to equity raises in E&P. Hence, most of the refinancing we expect is likely to be driven by debt rescheduling, relaxation of covenants and extensions.
ABF APTD BMY CNE CARR CCH DIA HLMA BOWL KOS PHAR POLR QLT SEPL TBCG TLW IO7
1H’20 results were solid with Primark LfL sales -0.5% yoy marked by continued recovery of LfL growth to +0.2% in Eurozone. Primark operating margin declined -50bps yoy to 11.9%, better than initial company expectations.
H1 PBT is broadly in line following recent COVID updates and there is no change to COVID guidance, with management still expecting to lose £650m of sales per month on closed Primark stores. Group trading, cash and Primark Group PBT £636m (+3% cc YoY) versus consensus of £643m. Net cash is £801m, meaning that with the additional drawn RCF, ABF has £1.5bn of cash to hand. In addition, it is now eligible to access funds from the Covid Corporate Financing Facility. Primark EBIT £441m (-1% cc YoY); total sales and LfLs confirmed at +3.9% (cc) and -0.5% respectively. LfLs across regions have been pre-reported and were UK: -1.7% (FY19: -1%) following tough comparatives in Q2, Europe: +0.2% (FY19: -2.9%) with strong performances in Italy and France and an improving performance in Germany. LfLs in the US continue to be strong. Full year operating margins (at Primark) were -50bps, in line with expectations owing to FX, but offset by the benefit from reduced material prices and better buying helping to lower operating costs. Clearly prior expectations to open c. 1m sq ft of space at Primark will be revised down, 0.5m sq ft had been planned to open in Q3; these plans have been delayed. YTD Primark has opened 0.2m sq ft. Sugar and remaining businesses Sugar: EBIT £12m (+£9m YoY) a touch ahead of expectations of £10m. With sugar prices already contracted in H2, we expect profits to improve in H2 following recovery of contracted EU sugar prices YoY; thus we continue to expect profits of £120m for the full year. Elsewhere, the Grocery, Ingredients and Agriculture business performed in line, with EBIT +12%, -2% and +7% respectively, in line with commentary at the pre-close. Outlook & valuation Guidance remains unchanged having closed 70% of its stores. Crudely assuming a Primark gross margin of 50% on £650m of lost sales with operating costs halved (in periods when stores are closed) implies £200m less profit per month YoY for the Primark business and roughly £100m of cash burn. Therefore, if stores remain closed for three months, we would expect profits to be approximately c. £600m lower YoY. Management continues to see no impact on the Sugar, Grocery, Ingredients and Agriculture businesses. Valuation based on consensus forecasts: CY21E PE is 14.5x versus c.17x pre-COVID-19.
March Retail Sales saw the worst decline since the monitor began - UK total retail sales fell -4.3% (12 month average +0.6%) with LFLs down -3.5%. This was drive by non-food. 3 month average non-food sales fell -6.6% with LFLs down -6.7%. Food sales recorded its best growth since April, which was boosted by Easter, with a 5.1% increase in total sales and LFL sales up 4.9%. Non-essential stores closed towards the end of March. In the first three weeks of March, total retail sales grew 12%, but then declined 27% in the last 2 weeks. Food and essentials saw a massive surge in demand in the early part of March only to drop into negative territory post lockdown and the introduction of social distancing rules. Non-essential stores were impacted by deserted high street and closures, with the rise in online not enough to offset this. Non-food channels saw diverging performances with 3 month average total and LFL in-store non-food sales falling -13% as a result of ‘non-essential’ stores closing in the second half of the month. Online sales were up 18.8% (12 mth average +4.4%) and penetration surged to 43.5% given the lack of store sales. Winning categories were computers and accessories, board games, fitness equipment and toys, which all saw a sharp rise in sales as the country moved to home-schooling and working-from-home. Other categories which benefitted were fridges and freezers, everyday hygiene products, and outdoor toys. Worst hit was fashion clothing and footwear, particularly adult clothing. Many retailers had a mid-season sale to try and shift inventory. Interestingly, there was a spike in fitness clothing and formal wear above the waist (for the webcams?). Large ticket items like furniture and even high-end mobile phones suffered as consumers became nervous about future finances. Home accessories & house textile sales also fell, though cooking equipment held up. Elsewhere, in Health & beauty, health products spiked while beauty products went into decline. There was a strong decline in jewellery & watches and travel accessories. The strong usually get stronger in a downturn while recovery plays tend to get set back a year or so as they typically emerge with more debt and a reduced ability to invest. We would favour the more consistent, proven stories like B&M (Buy, TP U/R), JD Sports (Buy, TP 700p), Greggs (Buy, TP U/R), Watches of Switzerland (Buy, 370p) and WH Smith (Buy, TP 2000p) for the longer term, with Halfords (Buy, TP 180p) as a deep value pick.
ABF ASHM ASC AVV BME DEBS BRK CARD CLIN GRG HFD IMO INF JD/ KNOS KGF MKS MMH WINE NXT PZC SCS SMWH WRKS VMUK WOSG SDRYN NBRNF
Bullet
Most retailers have now shut all stores except for essential retailers which include B&M, Halfords, Kingfisher (B&Q, Screwfix), Marks & Spencer and WH Smith. As retailers work out how to trade these sites safely, it is unclear how many of their sites will be able to stay open for the duration. The staff of any stores/sites closed will be furloughed and eligible for the Coronavirus Job Retention Scheme. Online operations continue to run for most retailers. This may not be sustainable due to insufficient employees or pressure that employees do not want to work. For example, Next has now closed its warehouse. Demand is expected to be severely impact in clothing and big ticket/home related categories as consumers batten down the hatches. This will result in stock issues later on and increased discounting to clear seasonal stock in the summer months. Retailers stand to benefit from a number of the Government support packages including a 12-month business rate holiday, the Coronavirus Job Retention scheme, the deferral of all HMRC payments for three months and potentially business interruption loans. We have modelled cash burn scenarios for all bricks & mortar led retailers in our coverage, assuming all stores and online operations are closed. Some have indicated their cash burn; the rest we have estimated adjusting for a business rate holiday. We have offset the cash burn in months 2 to 4 with the Coronavirus Job Retention Scheme payments from the Government. We do not take into account the unwinding of working capital, though we have shown historic trade debtor numbers on the balance sheet, or the benefit from deferral of all HMRC payments. A dividend suspension or non-payment of previously announced dividends has been indicated by all retailers as they look to preserve cash. Valuations are focused on liquidity. As our scenario analysis shows, most companies have the liquidity with current facilities to ‘trade’ through a prolonged downturn, though for some this is reliant on Banks waiving covenants. The strong usually get stronger in a downturn while recovery plays tend to get set back a year or so as they typically emerge with more debt and a reduced ability to invest. We would favour the more consistent, proven stories like B&M, JD Sports, Greggs, Watches of Switzerland and WH Smith for the longer term. All published forecasts and target prices are under review.
ABF ASC BME DEBS CCR CARD CCH CVSG FDM FIF GRG HFD HILS JD/ KGF MKS MMH MGGT WINE NXT SCS SMWH SSE WRKS WOSG SDRYN NBRNF
Bricks & mortar retailers likely to benefit from the Job Retention Scheme the UK Government announced on Friday. Wage costs are the largest P&L costs. Non-food retailers started to shutter stores from last week. Online businesses are unlikely to benefit to the same extent as they continue to trade, though some may benefit if distribution/head office workers are furloughed. A grant will be given to employers who put employees on furlough rather than lay them off, which will be paid back via PAYE. The payment will be backdated to 1 March and last 3 months initially. The Government will repay the employer 80% of an employee’s salary, up to £2,500 per month. The exact benefit at an individual company level is unclear as companies work through the detail. Many questions are left unanswered at this time. It is likely to apply to store staff and potentially some in distribution, though not all retailers run their own distribution centres. There are likely to be fewer head office and support opportunities. Those with international operations may also benefit from similar schemes, particularly in Europe, where such schemes are in operation although the subsidised amount varies by country. The position in the US is currently unknown. We have attempted to simplistically quantify what the benefit of UK action may be by company (Figure 1). Using the last Annual Reports, we have taken total wage costs (minus director salaries) and average number of employees from the last published Annual Report for each company. We have calculated average monthly earnings per employee and estimated what proportion are UK based to give a monthly benefit. For some retailers, store staff have a high proportion of commission (e.g. Watches of Switzerland, ScS) which would disappear anyway in a closure situation. HMRC has also suspended quarterly VAT payments until the end of June and firms will have until the end of the year to pay them. This is in addition to the deferral of all HMRC payments (e.g. PAYE, National Insurance, tax) and 12-month business rate holiday. These should all help short-term cashflow and ensure most retailers can deal with a 3-month closure. All forecasts, except for WH Smith, are pre-COVID-19 impact. WH Smith gave guidance on the potential COVID-19 impact, though events have moved on since then. With the situation changing by the day, we await better visibility before changing numbers. We would expect very few dividends, if any, to be paid out by retailers over the next 6 months. Events like this tend to result in the strong getting stronger while recovery plays tend to get set back a year or so, as they emerge with more debt and less ability to invest. We would favour the more consistent proven growth stories like B&M, JD Sports, Greggs, Watches of Switzerland and WH Smith.
ABF ABI ABI AAL ASC BME BHP DEBS CARD GLEN GHH GRG HFD JD/ KGF MKS WINE NXT RI RI RIO SCS SMS SMWH WRKS WOSG ZTF SDRYN NBRNF DVL
Today’s unaudited market and trading update showed FY19 sales and EBITDA in-line, with EPS 2% behind our forecast (on higher D&A costs). NightHawk sales rose 14.3% to £22.1m driven by volume growth from existing clients’ emergency service requirements (part offset by price). Routine Cross Sectional (+26.6% revenue growth to £18.9m) benefited from Medica reporting a greater proportion of their partners scan volumes. As expected, group gross margin was down c.120bps to 47.8%, but this was 40bps above our forecast. The group’s adjusted operating profit margin reduced 310bps, part due to investment (in people and process). Adj EPS FD of 8.13p was 2% below our forecast, but nevertheless we see these as solid results. New strategic plan announced: Management have unveil their plan to organically double revenue within 5 years (from their core business). This can drive operating leverage, which could also be supplemented by growth from new business lines and selective M&A. The ex-Covid guidance suggests 12-14% organic revenue growth in the short and mid-term, with a steady state gross margin at 43-45%. An incremental £6m capex will be spent into the mid-term to optimise the business. Management guide to a 20% operating profit margin (ex-operating leverage – leverage that we leave as upside to our new base case forecasts). Medica today separately announces a partnership with Qure.ai to use AI to improve workflow efficiency and clinical decision support. Guidance is any ex-COVID impact. Management flag they see early signs of a 30% reduction in NightHawk cases (as people self-isolate/avoid A&E). Updates will be provided as management get visibility. We estimate a 30% decrease in NightHawk volumes for 3 months could represent 12% downside to our FY20E EPS forecast, ceteris paribus (which are also ex COVID). Valuation update: New DCF-based TP of 150p.
ABF BAG AGK CARD IWG MER MGP SEPL GHGUY BTVCF
COVID-19 update Since closing all European Primark stores (30% of sales) on 16th March, all UK Primark stores have now been closed (41% of sales) until further notice. This represents a loss of £650m of net sales per month. Following discussions with landlords and the government’s recent proposals, management believes that 50% of operating costs can be recovered. Crudely assuming a gross margin of 50% on Primark sales and operating margins of c. 11%, this means operating losses on such sales would reduce from c. £260m a month to c. £130m a month. New orders to suppliers have also been stopped. Management continues to see no impact on the sugar, grocery, ingredients and agriculture businesses. Valuation Valuation has fallen back to just 11.3x CY20E PE with earnings growth on our existing forecasts of 8% (EPS 2-year CAGR CY19E-CY21E) versus 17x last month. However, earnings visibility clearly remains poor at this stage, with significant downside risk. On our outer year forecasts (arguably based on more reliable earnings forecasts), ABF trades on just 10.6x CY21E PE.
Quantifying Coronavirus. Hannover Re warned on its Q4 call on March 11th that the impact from the Coronavirus could be as high as €200m, which would include losses in D&O (as well as event cancellation, credit and business interruption). Beazley at its full year results meeting said it could see additional claims if there was litigation around Coronavirus. We assume a $75m impact for Beazley ($25m event cancellation, $50m higher D&O claims) and a $15m impact for D&O claims at Hiscox. Lancashire does not write casualty insurance, but we have tempered growth expectations in Energy, Marine and Aviation lines on the lower oil price and reduced travel activity. Forecasts lowered. We update forecasts for three key items – full year results over the last month, investment markets, and the impact of the Coronavirus. We cut 2020E EPS by over a third at Beazley and Hiscox (a blend of risk-asset investment losses and more conservative casualty loss assumptions), and lower 2021E EPS by 9-10% for the group, primarily due to lower investment yields, but also lowered growth expectations. We now forecast no growth in the dividend at Hiscox, assuming a fourth year of below-target returns, and no special dividend from Lancashire, given improving pricing and growing top-line. Lowered target prices on lowered forecast returns. With no changes to long-term growth assumptions in the low single digits, we raise Beazley’s cost of equity for on-going uncertainty around its Casualty portfolio, and nudge down our target PE to 12.5x, versus 15x and 13x for Hiscox and Lancashire (both unchanged), equating to 2.0 and 1.6x price to tangible NAV (both lowered for lower forecast ROEs). We therefore lower price targets across the group, while leaving recommendations unchanged. Raised growth expectations or increased visibility into 2022 could justify higher target multiples in time, but, in the context of reductions to 2020E forecasts (with more to come from consensus), we see greater defensiveness among Personal lines insurers, and more value if macro improves quickly among Life insurers. Lancashire is the most defensive of the sub-sector by underwriting exposure and investment portfolio, with the greatest opportunities if macro weakness translates to a significantly better (re)insurance market.
ABF ADM AV/ BEZ CWR DIA HFD HSX KGF LRE RIV RSA SBRE STEM DIISF
Shore Capital hosted a breakfast meeting with investors and Associated British Foods' senior management in London on the 26th February. In the current fluid times, we have held back providing feedback given what seems to an ever-changing backdrop (both in financial market and consumer sentiment and activity). However, whilst short-term visibility in some areas of the business has reduced, we believe the key traits which position the business to deliver robust medium to long term earnings growth, namely sustained cash generation and balance sheet strength, come evermore to the fore in uncertain times. Therefore, whilst we fully expect a short-term hit from COVID-19 (not yet included in forecasts) we highlight lessons learnt at a still immature Primark, expanding medium term Grocery margins, strong Sugar EBIT recovery (H2 weighted), the aforementioned cash generation and critically the very strong balance sheet (net cash of £939m* at the September 2019). We view a PER of c13x and a sub 7x EV/EBITDA multiple as a compelling medium-term entry point to high quality ABF. BUY.
February’s retail sales were up 0.1% (12 month average -0.2%) with LFL sales down 0.4%. Storms Ciara, Dennis and Jorge did their best to dampen retail sales. There was a pickup in food and health & beauty towards the end of the month as concerns around coronavirus increased. Household appliances, computing, furniture, health & beauty and home accessories categories all reported growth. Lacklustre non-food performance generally again. In-store non-food 3 month average sales were down 1.9% on a LFL basis and -1.8% in total, which is better than the 12 month average total of -3.1%. However, December sales, which included Black Friday last year, is still in the average and so the average is overstated. Online non-food sales fared better and were up 3.6% versus the 12 month average of 2.9%. Home related categories generally performing better. Home appliances (the strongest growth since May) was the top category, partly replacement cycle, but also potentially short term replacement demand following the floods. Furniture saw its best growth since October, helped by some promotions, and home accessories sales were also up, though at a slower rate than January. However, home textiles had another disappointing month. Clothing and footwear suffered, showing that the consumer still has a tight budget and is having to prioritise spending, in our view. The weather probably did not help as while it was wet, it was also warm. Department stores were affected by the weaker footfall, with rain over 3 weekends and half-term trade not as spread out as usual. Computing had another good month, helped by Windows 7 reaching the end of its life and no longer getting security updates. Food saw some benefit from coronavirus towards the end of the month and recorded its best growth since April last year, which was helped by Easter. Total food 3 month average food sales were up 1% (12 month average +1.2%) with LFL sales up 0.3%. March is also going to be challenging for retailers from a supply chain and demand perspective as coronavirus spreads and cases pick up (see our recent report: Coronavirus - A fluid situation ). China may be starting to get back to work but factories are still generally not operating at full capacity. Most non-food retailers we have spoken to said stock levels were fine until after Easter/early summer, but there could be potential supply issues come the end of the summer/autumn.
ABF ASC BME DEBS BATS CARD CBG GRG HFD INF JD/ KGF MKS MMH MIDW WINE NXT REL SCS SMWH WRKS ULE WOSG WG/ SDRYN NBRNF
Immediate consideration was potential supply chain disruption and exposure to China, but other key centres like South Korea and Cambodia are seeing an increasing number of COVID-19 cases. Retailers are reporting that factories in China have restarted production but at reduced capacity. Most have said that they have enough stock to see them through Easter and into early summer, so the longer the production delays continue, the more likely there may be some availability issues from late summer/autumn. The flipside may be less surplus stock and less discounting. Few retailers have direct exposure in mainland China though WH Smith and Watches of Switzerland have exposure to Chinese tourists. WOSG reported last week that demand continues to exceed supply and reiterated its guidance to year-end April 2020. SMWH has little Asian exposure. Attention has now switched to demand weakness and the potential economic/social impact as the virus has reached Europe. When demand falls, the most vulnerable companies tend to be those with high levels of debt, low margins and inflexible fixed costs. The retailers in our universe we would consider to be more vulnerable are low-margin players such as Superdry, Dixons Carphone and ASOS. Retail share prices have corrected sharply. We believe it is too early to adjust forecasts for any potential impact from COVID-19 given the fluid nature of the situation. The sector is down 14.4% YTD versus the market down 12.5%. If you believe that COVID-19 will have a short-term impact like SARS, then share prices are already discounting material downgrades which we believe should not impact long-term equity stories. SMWH & B&M seem to us to have been disproportionately sold off given events to date. SMWH has some protection from its High Street/UK Rail and hospitals business which we estimate accounts for c.45% of FY21E group sales. B&M has some protection from having a defensive grocery/FMCG business (c.45% of sales), weaker comps ahead and balance sheet strength backed by the forthcoming DC sale & leaseback deal. The best way to make money in Retail over the longer term has consistently been roll-out stories, whether physical or online, as they are less reliant on the underlying consumer. Events like this can present a great buying opportunity. We highlight B&M, Greggs, JD Sports, WH Smith and Watches of Switzerland as our preferred BUYs. Our value picks are Next, Halfords and TheWorks.co.uk. We have SELL ratings on Kingfisher, Marks & Spencer and Superdry.
ABF ASC BME DEBS CRN CARD CRW GHH GRG HFD IWG JD/ KLR KGF MKS MCRO WINE NXT RTN RWA ROR SCS SMWH STAN WRKS UU/ WOSG XPP SDRYN NBRNF DIISF
Revenue ahead: Total FY19 revenue is expected to be $477.8m, 9% ahead of our $440m estimate and a 132% y-o-y increase. We understand the extra revenue is due to the early start of several new contracts during 2H19. EBITDA beat: FY19 adjusted EBITDA is expected to be c.$188m, 2% ahead of our $185m forecast. We believe the extra revenue has dropped through to EBITDA, partly offsetting mobilisation costs. Increased utilisation: Contracted asset utilisation during the year averaged 97%, a 12ppts increase over FY18. Note that this does not include uncontracted rigs (both onshore and offshore). Of the 49 onshore/offshore rigs in the fleet, we understand 10 are uncontracted and are being actively tendered. Good visibility: The backlog at year-end FY19 was $1.3bn, up $0.1bn y-o-y and down $0.2bn on 1H19. During the year there were c.$600m of contract renewals. This backlog continues to provide excellent visibility and helps underpin our revenue forecasts in both FY20E and FY21E. Stable balance sheet: Net debt at period end was $606m, down $11m during 4Q19 due to working capital improvement, we understand. We estimate further balance sheet deleveraging in FY20E, aided by scheduled capital repayments. Forecasts: We upgrade FY19E PBT and EPS by 2.3% to reflect the updated guidance. We leave our FY20E and FY21E P&L forecasts unchanged. We adjust net debt to reflect the higher working capital. Valuation remains very attractive, trading at only 5.7x our CY20E earnings, 5.6x EV/EBITDA and a double-digit FCF yield (after including expansionary capex). We leave our $28.90 12-month TP unchanged.
ABF ADES DPH GHG DQ6
ABF has issued a solid 1H’20 trading update with adjusted EPS expected to be above last year (pre- and post-IFRS 16). Primark continues to take share of market with sales expected to grow 4.2% yoy in 1H’20 (constant fx), driven by higher selling space.
Guidance remains unchanged with management continuing to expect a better H2 performance driven by Primark and a recovery in the Sugar business. We expect no changes to forecasts. Whilst earnings momentum is improving, valuation on 16.6x CY20e PE for earnings growth of 8% (EPS CAGR CY19e – CY21e) remains demanding in our view. Primark Primark sales were +4.2% (cc) versus the first 16 weeks of FY20 at +4.5% (cc). 0.2m sq ft of space was added in the period and Primark now operates from 375 stores (LY: 352, 14.3m sq ft). It appears to be on track to open at least 0.9m sq ft this year. Given stores mature instantly, the c. 4.6% increase in physical space implies LfLs remain broadly flat versus a flat performance for the first 16 weeks of FY20. Primark UK sales were +3% with LfLs down -1.3% following “marginal declines” reported in January. Trading was described as being ‘good’ over November and December, but weakened in January and February following tougher comparatives. The European LfL performance was +0.5%, a continuation of the positive performance first reported in Q4. Similarly, the notable improvement in Germany continues. The US Primark performance continues to be strong. As expected, operating profit margins at Primark in the period decreased, owing to prior purchasing at stronger dollar rates. Guidance for “small reductions in margins” remains unchanged with management expecting the benefits from reduced material prices and better buying helping to lower operating costs. GBP recent appreciation should benefit the margin outlook going forward. COVID-19: Primark is well stocked, having built inventories ahead of the Chinese New Year and hence management expects no short-term impact. If factory production delays are prolonged clearly the risk of supply shortages will increase. Sugar, Agriculture, Ingredients and Grocery Sugar: Sales were “ahead” (first 16 weeks of FY20: +7% (cc) as EU sugar prices continue to improve. This is an improvement from H2 19’s broadly flat performance. Full year consensus expectations is for sales growth of c.7%. Grocery was “flat” (first 16 weeks of FY20: flat). Ingredients sales are now expected to be “ahead” having been +3% for the first 16 weeks, but adjusted operating profit will decline. Agriculture revenues will also be “ahead” (first 16 weeks: +10%), but profits are also expected to be flat.
2019 was fundamentally another challenging year for retail, highlighted again by the number of CVAs & administrations. Weak volatile demand, structural shift online, inflationary opex headwinds and unprecedented levels of discounting pre-Christmas resulted in a particular hard trading environment. The consumer outlook in 2020 appears healthier as real wage growth gives consumers more disposable income & interest rates look set to remain low. However, the broader economic outlook remains unclear and the industry’s challenges are ongoing. While the UK has formally left the EU, trade talks are yet to begin, the results of which may impact tariffs, Sterling and retail profits. Coronavirus & China shut-down could impact short term earnings. While it is too early to take a view, there has been an immediate impact on Travel related retail. Supply chains may be affected if there is a prolonged lock down, though current stock levels should see all we have spoken to through Easter. More will be known next week when it is clearer how many people have returned to work. But it is not all doom and gloom out there. Who would have predicted a decade ago that a bricks and mortar retailer, JD Sports, would achieve the accolade of ‘blue chip stock of the decade’ with its shares up 3200%. Not only did JD Sports end the decade at an all-time high share price, but so did boohoo, Dunelm, Games Workshop, Greggs, Hotel Chocolat, Ocado, WH Smith & Watches of Switzerland. There is no one model which is the Holy Grail for success in retail as can be seen from the list above which contains a mix of more traditional ‘bricks’ heritage retailers and pure play, as well as old brands and new. We look at the traits these successful retailers have in common and conclude the most important success factors in today’s retail market are an evolving mind-set, a customer-centric attitude, and data analytics. After 4 years of stockmarket underperformance, the Retail sector rallied 37% in 2019. Investors started to reappraise UK domestics in Q4 after greater Brexit clarity. The sector is now trading at a PE premium to the market and, given lower than market growth prospects, appears priced for recovery and upgrades. Roll-out stories have consistently been the best way to make money in retail, whether physical or online, as they are less reliant on the underlying consumer for growth. Stock picking is key and we highlight boohoo, Greggs, JD Sports, WH Smith and Watches of Switzerland as our preferred BUYs. Our value picks are Next, Halfords and TheWorks.co.uk. We maintain a SELL on Kingfisher, M&S and Superdry. We have revised TPs for Dixons Carphone, N Brown and Next in this note.
ABF ADM ASC DEBS CARD CVSG GRG HFD JD/ KGF MKS WINE NXT SCS SMWH WRKS UMI UMI SDRYN NBRNF
Looking for greater clarity and stability: After a decade dominated by macro and political themes, with stock picking focused around topics like the financial crisis, Brexit and trade wars, the new decade is bringing (we hope) at least some signs of stability. We believe therefore we will start to see more differentiation within sub-sectors in 2020, rather than rotational shifts between sub-sectors based on macro themes - and the winners will be those companies with the most structural scope to expand their earnings power and quality (under-pinning growth as we move through latter part of economic cycle). Upgrade Auto Trader to Buy: We have today upgraded Auto Trader to Buy - it creates one of the most polarising debates in the sector (after Cineworld), and we believe it has significant structural scope to grow its revenues, that cyclical headwinds may be easing, and that competitive threats are over-stated. The valuation discount that has opened up versus Rightmove (and the recent transaction benchmark of AutoScout) provides an attractive entry point into a long-term winner. Downgrade RELX to Sell: On RELX, after a decade when almost everything went right, we see the risk-reward worsening, so downgrade to Sell. Profit growth could slow given the Risk division potentially slowing as the Insurance segment matures, potential disruptive developments to come around Open Access in the US, and Thomson Reuters becoming a more assertive competitor in the US Legal market. We would advocate taking some profits and looking elsewhere for better opportunities. Updates & re-iterations: We have also published notes today on Informa (structural qualities becoming better appreciated), Hyve (earnings upgrade cycle starts with focus on operational execution and recent US acquisition) and DMGT (which we recently downgraded after a strong run given revenue and profit growth is stuttering). Key picks for 2020: On the long side, we highlight Informa, Auto Trader and Cineworld as our preferred larger cap names, with Euromoney, Moneysupermarket and Sumo amongst the smaller cap names. At current levels, we remain cautious on the likes of RELX (Sell), DMGT and Just Eat.
ABF AUTO BYG BMY BRK CRN DPH ERM FDEV GMS HFD HAS HEAD HYVE INF TKWY JE/ LAM MONY OTB REL RSG RMV WRKS WG/ DQ6 NBRNF
ABF’s trading update for the 16 weeks to 4 th January (following reasonably closely behind a 6 th December AGM statement) contains little to surprise in our view, with management again reiterating its expectation for EPS “progress” in the year on a post IFRS 16 basis. We leave our forecasts unchanged, looking for CPTP of £1,510 and EPS of 145.6p, yoy growth of 8.0%. With improving momentum in Primark’s Eurozone performance emerging (notably in Germany) we reiterate our BUY recommendation.
We expect no changes to forecasts. The sugar business continues to show signs of recovery and pleasingly Primark Germany appears to be improving while the UK performance remains subdued. Primark performance Sales were +4.5% cc (H1FY19: +4.4%, FY19: +4.2%) versus consensus c. +5%. Primark has added 0.2m sq ft of space, operating from 376 stores (LY: 364) trading from 15.8m sq ft and therefore appears to be on track to open at least 0.9m sq ft this year, a touch below previous guidance of 1m sq ft. Given stores mature instantly, the c. +5% increase in space implies LfLs are broadly flat (LfL 1H FY19: -1.5%, LfL FY19: -2%, LfL Q4 FY19: “Positive”) versus consensus expectations for LfL declines of -0.3%. In keeping with other trends observed across the UK High Street, UK sales were stronger in November and over Christmas. As such, total UK sales were +4.0% with LfL “marginally declining” (UK LfL H1 FY19: +0.6%; FY19: -1%). In Europe total sales were +5.1% with LfL reported to be “in growth” following similar positive trends at Q4 (FY19: LfL: -2.9%; Total: +4.8%). France and Italy saw another strong performance and there was a “notable improvement in performance” in Germany. The US continues to see LfL growth. As expected, operating profit margin in the period decreased, owing to prior purchasing at stronger dollar rates. However, guidance appears to be unchanged on margin which was previously for “small reductions” with management expecting the benefits from reduced material prices and better buying to help to lower operating costs. Since prior guidance in September, we note that sterling’s appreciation should have benefitted the margin outlook. Sugar, Agriculture, Ingredients and Grocery Sugar: Sales +7% (cc) as EU sugar prices continue to stabalise. This is an improvement from H2 19’s broadly flat performance and in line with full year consensus expectations for sales growth of c. +7%. Grocery: flat, vs FY consensus: c. +3%, Ingredients: +3%, vs FY consensus: c. +3%, Agriculture: +10%, vs FY consensus: c. +3% Valuation/Our view Earnings momentum is steady at Primark and improving in the Sugar business, but the valuation on 16.8x FY20E PE remains demanding in our view with earnings growth of +9% (EPS 2 year CAGR FY19E – FY21E).
ABF issued a solid 1Q'20 trading update with group revenues up 4% yoy in constant FX. Primark continues to take share of market with 4.5% yoy growth at constant fx, driven entirely by higher selling space with a marginal decline in LfL growth.
December distorted by Black Friday, but underlying growth appears weaker. Total retail sales were up +1.9%, with LFL sales up +1.7%. Adjusting for Black Friday (by combining November and December), the BRC estimates total sales growth was down -0.9% which is below the 3 and 12 month averages of -0.4% and -0.1% respectively. The closer proximity of Black Friday to Christmas meant sales in the peak Christmas week were cannibalised and the later timing of Christmas Day allowed for a higher proportion of sales to be made in the days preceding. Non-food 3-month LfL in-store sales were down -3.8% versus the 12-month average of 3.1%. Online non-food growth was +12.8%. Adjusting for Black Friday (by combining November and December), the BRC estimates online non-food growth was up +2.6%, which is still below the 12-month average growth of +3.3%. Food sales slowed with the total 3-month average at +0.7% in December below the 12-month average of 1.4%, which is reflected in the recent weak results reported by the Big Four UK food retailers. Discounters, however continue to outperform. Food inflation edged up slightly to +1.5%. The strongest performers over the two-month period were Computing, Household Appliances and Clothing. Clothing was characterised by promotions in December, from the Black Friday deals and from earlier pre-Christmas discounting than last year. Fashion brands did well, but the relatively mild weather in December led to winterwear and knitwear underperforming. Electricals and Housing Appliances performed well over Black Friday with growth across both large and small appliances, while computing (after adjusting for Back Friday distortions) saw moderate growth helped by computing accessories but constrained by sluggish growth in laptops. Furniture did actually grow in December helped by Black Friday, but Boxing Day sales were a lot lower than last year with consumers preferring smaller items. The run up to a General Election typically does not help big ticket sales. Homewares and Home textiles saw weaker demand. While Black Friday helped sales, it also cannibalised the Boxing Day events, which proved disappointing. Weak categories: Toys and Stationery were weak, with the shrinking toy market facing stiffer competition and consumers shifting to entertaining children with activities on smartphones and computers. Health & Beauty were helped by Black Friday, but after adjusting for Black Friday distortions the category performance was more muted. Sales in Beauty struggled in the mid weeks of December which prompted the onset of a price war in Beauty fragrances.
ABF ASC BME DEBS CARD CEY CHH GRG HFD JD/ KGF LIO MKS MMH WINE NXT POLR RAT RWA SCS SMWH WRKS WOSG SDRYN CELTF NBRNF
ABF’s recent AGM statement (6th December) contained a reiteration of guidance initially set out in its FY2019 results (5th November), which culminates in management anticipating EPS “progress” in the year. With ABF now reporting under the IFRS 16 accounting standard, we introduce new forecasts on this basis, looking for FY2020 EPS of 145.6p, which would represent c8% year-on-year growth. We view ABF as a high-quality operator, with Primark offering the potential for long-term growth, Twinings Ovaltine representing a very high value asset and the outlook for Sugar materially improved. We view a sub-9x EBITDA entry point as attractive, noting forecast net cash of £1.4bn (pre leases), which is forecast to build strongly. We reiterate our BUY recommendation.
November distorted by Black Friday and Cyber Monday timing, but underlying growth appears stronger. Total retail sales were down 4.4%, with LFL sales down 4.9%. Adjusting for Black Friday, the BRC estimates total sales growth was up 0.9% (LFL +0.4%), above the 3- and 12-month averages of 0% and 0.2% respectively. Black Friday is the second highest trading week of the year for non-food. Discounting was prevalent. Deals started earlier and targeted more products than last year, according to the BRC. Electronics and clothing both benefitted from big discounts. Non-food 3-month total in-store sales were down 5.2% with LFLs down 5.5% versus the 12-month average of 3.4%. Online non-food growth was down 10.1% versus the 12-month average. Adjusting for Black Friday, the BRC estimates online growth was up 8%, with penetration up 2.1 percentage points to a record 36%. The strongest performers were the typical Black Friday categories: jewellery, electricals and clothing. Adjusting for Black Friday distortion, clothing did see growth in November. Womenswear appears most sensitive to impulse buying, with partywear reported as sluggish. The mid-month cold snap did drive demand for knitwear. The lack of promotional activity ahead of Black Friday meant online clothing sales suffered. Footwear was also impacted by a lack of promotions; adjusting for timing issues, it did not see growth. That said, demand for boots did pick up as the temperature dropped. Electricals was driven by heavy promotions with early demand for small domestic alliances. Deals started early in computing and targeted more popular products from handsets to earbuds. Furniture fell back into decline in November as highlighted by the ScS trading update. The run up to a General Election typically does not help big ticket sales. Homewares and home textiles also suffered, though Christmas gifting favourites were said to be doing well. Weak categories: The health & beauty market remains weak, with beauty the worst performing category given last year’s tough comparable. Toys and baby equipment remained one of the worst three performing categories as deals for Black Friday had not begun. Soft toys performed relatively better. Food sales were more steady, up a total of 1.3% or 0.3% on a LFL basis, and unsurprisingly was the only category to see growth as it is mostly unaffected by Black Friday. Growth has slowed (12-month average 1.5%), driven by an easing of inflation according to the BRC.
ABF ASC BME DEBS CARD CEY GHH GRG HFD HSP HYVE JD/ KGF MKS WINE NXT SCS SMWH WRKS WOSG DQ6 SDRYN CELTF NBRNF
October was a slightly better month, with sales back in marginal growth, rebounding from a challenging September. October’s total sales were up 0.6% (Sept -1.3%) with LFL +0.1% (Sept -1.7%). Non-food sales were positive in October, according to the BRC, but the average last 3 month non-food in-store sales were down -1.9% (LFL -1.8%) with in-store LFL sales down -3.7% partially offset by 5.1% growth in online. Food remains solid with 3 month food sales up 1.6% with LFL +0.5%. October was ‘an extraordinary period of discounting’, according to the BRC suggesting growth was bought and pressure remains on profits. Fashion was the best performing category in October, helped by a short cold snap, which benefitted more wet weather gear rather than cold coats and knitwear. However, consumers were bargain hunting with discounting described as ‘high’. Like clothing, footwear also benefitted from promotions and posted its best performance since Sept 2015. Note in Next’s Q3 trading update, Lord Wolfson felt Next’s strong October sales performance (full-price sales +5%) recouped some of the weak September sales (full price sales + 1%) and warned not to extrapolate this growth rate forward. M&S reports H1 results tomorrow (Oct 6) with Superdry on Oct 7. Furniture returned to growth, with consumers taking advantage of lower ticket item. Beds outperformed sofas. Promotions helped Home Accessories and Household Textiles, with Home Appliances and Computing categories (new iphone) in growth. Consumers seem to be holding off on Christmas purchases to an extent, with Health & Beauty and Toy sales down. This could be due to the timing of half-term. Other categories in decline were Gaming and Home Improvement
ABF ASC BME DEBS CARD ERM GRG GMS HFD IMB IWG JD/ JUP KGF MKS MMH WINE NXT SCS SMWH WRKS WOSG WEIR SDRYN NBRNF FDRVF
FY'19 adj. EPS rose 2.0% yoy to 137.5p, slightly ahead of guidance of adjusted EPS in-line with last year and 1% ahead of Reuters consensus. Group adj. operating profit rose 1.0% yoy with growth at Primark and Grocery more than offsetting the -£97m decline in Sugar.
Following the pre-close trading statement issued recently in September, FY19 profits are a touch ahead of expectations. There is therefore room for consensus forecasts to nudge up. Meanwhile the outlook for next year is for Adj. EPS to “progress” and operating margin guidance at Primark has improved since September at Primark. Management now expects profits in the sugar business to materially improve. The details PBT of £1,406m (+2% YoY) versus consensus of £1,376m, and net cash of £936m in line with expectations Primark EBIT £913m (+8% cc YoY) versus consensus £907m with full year total sales and LfLs confirmed at +4.1% (cc) and -2% respectively, implying H2 LfLs of -2.5% and positive Q4 LfLs, having been negative in Q3. LfLs across regions have been pre-reported and were UK: -1% (H1: +0.6%), Europe: -2.9% (H1: -3.2%). Full year operating margins (at Primark) are, as expected, “ahead” by +40bps (consensus: +70bps), which implies H2 operating margins were c. –110bps owing to FX, following H1’s +190bps of improvement. Previously management expected full year operating margins to “reduce” in FY20. Since then sterling has appreciated and management now expects to benefit from reduced material prices and better buying, helping to lower operating costs. As such, management now only expects a “small reduction” in operating margins in FY20 (consensus: -70bps). Elsewhere, management continues to expect to open c. 1m sq ft of space at Primark Sugar: EBIT £26m (-78% cc YoY) versus consensus £28.9m, which implies performance in H2 stabilised. With EU stock levels tightening during 2018/19, management continues to believe stock levels will remain low going forward, underpinning spot EU sugar prices. We note consensus expects only modest sales growth in FY20 (c. +2%). Elsewhere the Grocery, Ingredients and Agriculture business performed in line, with EBIT up +10%, +8% and -30% respectively, with Agriculture reflecting the closure of the Vivergo bioethanol plant last autumn. Outlook and valuation Management expects sugar profits to improve materially this year and for strong profit growth in Grocery while Primark profits will benefit from further space openings offset by a “small reduction in operating margins” - as such, adjusted EPS is expected to progress (consensus: +8%) Whilst we acknowledge earnings momentum is improving in Sugar, the valuation on 14.8x FY20E PE still seems demanding for earnings growth of 9% (EPS 2 year CAGR FY19E – FY21E). HOLD.
Impact of lower bond yields. We put through 20 to 30 basis point reductions in investment yields to update for moves since mid-year. The average impact is low single digit reductions to operating earnings going forward, with higher leverage and longer duration at Aviva, DLG and RSA meaning proportionally the greatest impacts over time. We have also made material cuts to Hiscox and Lancashire earnings after disappointing H1 results. Technical profits more valuable in lower rate environment. In a low interest rate environment, consistent and growing dividendable earnings that are not overly dependent on investment returns should justify a higher multiple. We have updated our price targets to be based on earnings/return on equity when the full impact of current bond yields is reflected in reported earnings. This has led to lowered ROEs for most companies, which we have balanced by lower cost of equity where the operating performance has been reasonably strong, particularly for the Lloyd’s insurers and Admiral. More cautious views of dividends. Headwinds as lower investment yields earn through have caused us to lower dividend expectations for DLG and RSA (with the latter on top of cuts made immediately after H1 results), while cuts to Lancashire also reflect lower underwriting profit forecasts. Note the cut to DLG is to special dividend expectations, with regular dividend progression unchanged, while RSA is for the regular dividend – still growing, but more slowly than previously. Admiral is the only company where we have raised dividends, on the assumption the absolute payment is held flat from a higher base after a strong H1. Recommendation changes. We upgrade Admiral from Reduce to Buy, given resilient earnings through the low-point of the UK motor cycle with low sensitivity to investment income, and downgrade for RSA from Buy to Sell, on lowered earnings and dividend forecasts, with the most material risks of the non-life stocks we cover from lower bond yields. In addition, we have lowered our price targets for Aviva, DLG and Hiscox and raised them for Beazley and Lancashire. Lloyd’s insurers – remainder of the Hurricane season and industry news from Monte Carlo – we would not see Dorian as likely to be a market changing event, with Reinsurance dynamics less positive than Specialty. Personal lines - the FCA has delayed its interim report on customer loyalty until October – we would expect this to be the next event to review expectations. Our central case remains a gradual improvement in Motor pricing, but we have not assumed an improvement in margins into 2020/21E. Risks remain that inflation remains elevated or increases in H2 (Sterling weakness is not helpful) with Hastings the most exposed.
ABF ADM ASC AV/ BME BARC BEZ DEBS CARD GOOD GRG HFD HSX JD/ KGF LRE MKS MIDW WINE NESN NXT SAGA SNN SCS SMWH WRKS ULVR WOSG SDRYN NBRNF DIISF
One of the best recovery stories in the Retail sector or a brand which has had its day? In this note, we take a deep dive into the historic financials and show multiple entrenched negative financial trends which suggests SDRY is a major restructuring story; not just a 2-3 year brand repositioning story. A more flexible & nimble business model is required in our view. Retail in-store LFL sales have been in decline for the last 5 years, if adjusted for FX, maturing space and online. This suggests to us that Superdry’s range and brand issue go back further than the last 18 months. UK sales have hardly grown over the last 4 years. Retail, wholesale & online sales all fell in FY19. A struggling home market over a prolonged period suggests the ‘engine room’ is not working and that Superdry has structural issues. Internationally, Europe should have been more robust, given aggressive own store and franchise store expansion over the last 5 years would have increased brand awareness. The US is still losing money after 4 years & we believe is sub-scale. China seems an unnecessary distraction given the issues closer to home. Lack of operational leverage stands out, despite strong sales growth and mix shift to wholesale. Inventory turn is low relative to peers, reflecting the inflexibility of the business which needs aggressive restructuring in our view. Downgrade to Sell from Hold. Given the materiality of the non-cash onerous lease credit within normalised earnings (see page 21), we strip this out for valuation purposes. Most retailers in a similar position to SDRY are trading on a CY20 EV/EBITDA pre IFRS16 of 4x-5x. Taking the mid-point drives our revised TP of 370p, versus 490p previously.
ABF ASC BME DEBS CARD GRG HFD JD/ KGF MKS WINE NXT SCS SMWH WRKS WOSG SDRYN NBRNF
Business fundamentals Despite a difficult market, with notable market-wide client uncertainty given the macro and political backdrop, Brooks has still managed to achieve a higher level of net inflows than its peers. We continue to believe it remains well placed in terms of distribution to benefit from structural market trends. That said, we expect client confidence to remain low in the short term across the market. The focus on the core business has resulted in a broadly flat revenue yield, so the FUM growth feeds through to revenue growth. Good cost control and the efficiency measures announced in January have both helped the operating margin and we expect FY19 to represent an increase on the FY18 low point. Legacy issues Significant progress has been made on both the individual investor and Dublin fund issues and we believe the associated financial and reputational risks are much reduced. We expect more detail to be provided with the results. Forecasts and valuation Updated FY19E forecasts: revenue £105.5m, adjusted EPS 118.7p, DPS 51.0p. We increase our revenue, adjusted PBT, EPS and DPS forecasts for FY19E/20E/21E by 4-7%, as a result of the Q4 trading update. On an unchanged 15x multiple, we increase our TP by 7% to 2310p. We reiterate our BUY recommendation with a 21% FTR. Catalyst Full-year results for year ended 30 June 2019 on Thursday 12 September.
ABF ABC BRK CCFS DGE LLOY MGP NG/ OSB RI RI
Performance in Sugar continues to shows signs of stabilisation but some headwinds are gathering in the Retail business, owing to FX. The full year outlook is unchanged with adj. EPS expected to be flat. The details: Primark Full year sales are expected to be +4% (Q3 YTD: +4% (cc), H1: +4.4% (cc)), with LfLs of -2% (H1 LfLs: -1.5%, Q3: “Negative”) versus consensus expectations for full year LfLs of -1.8%. Sales in Q4 are said to be “positive”. Across the regions, UK full year LfL sales are -1% (H1 LfL: +0.6%.) implying H2 LfLs in the UK were -2.5%. Performance in H2 was impacted by unseasonable weather in May (as reported in Q3). Likewise in Europe, H2 performance also remains soft with full year LfLs down -3% (H1 -3.2%). Performance was once again weak in Germany, but strong in Italy and Spain. In line with positive trends reported at Q3, the US appears to be performing well with LfL growth and lower operating costs expected to reduce US operating losses. Full year operating margins (at Primark) are expected to be “ahead” (consensus: +70bps); this implies, as expected (owing to FX), H2 operating margins will be –50bps, given +190bps of improvement in H1. Looking forward, given current sterling rates, management now expects operating margins to “reduce” versus consensus expectations for +20bps of improvement. Elsewhere, Retail selling space increased by 5% YoY and for next year the company expects to open 1m sq ft of space - broadly in line with our expectations (0.9m sq ft). The details: Sugar, Grocery, Agriculture, Ingredients Full year sales and profits for Sugar are expected to be down, following H1’s -11% sales performance and management’s full year outlook is unchanged. Performance in H2 therefore appears to be stabilising. EU stock levels have tightened during 2018/19 and management believes stock levels will remain low going forward, underpinning spot EU sugar prices. We note consensus expects only modest sales growth in FY20 (c. +3%). Elsewhere, the Grocery, Ingredients and Agriculture business all appear to be performing in line. Our view Whilst we acknowledge earnings momentum is improving in Sugar, headwinds in the form of currency (at Primark) could start to create a drag on earnings going forward. The valuation, on 15.5x FY20E PE still seems demanding for earnings growth of 9% (EPS 2 year CAGR FY19E – FY21E). We retain our Hold recommendation
ABF’s trading update for the 52 weeks to 14th September 2019 reiterates FY2019 guidance, with adjusted EPS expected to be in line with last year. As such, we leave our FY2019 forecasts basically unchanged with EPS of 134.4p. Looking into FY2020, management is citing currency headwinds on Primark margins that are unlikely to be fully offset; hence, we lower our Primark EBIT contribution by c7%, and taking on board tax guidance and further EBIT tweaks take down our group EPS by c6% to 142.8p. On revised FY2020 forecasts, we still look for year-on-year EPS growth of 6%, growth which is captured in a September 2020F PER of 16.1x and an EV/EBITDA multiple of 8.0x. We remain positive on the medium-term ABF investment case, notably the growth potential of Primark and the strong cash flow and balance sheet which provide optionality. However, we concede that a return to positive LFL growth and the end to significant margin volatility are required as precursors to any re-rating, which is unlikely in the short term.
August another weak month – total retail sales were flat (3-month average -0.4%/12-month average +0.4%), with LFL down -0.5%. Non-food 3-month average in-store sales were down 3% (12-month -2.6%), with LFL down -3%. Food 3-month average food sales moved back into positive territory with total growth +1.7% (LFL -0.3%). Online non-food sales were up 2.2% versus 3month/12-month average of 3.4%/4.3% respectively, with penetration now 29.5% (versus 28% last year). On the positive side, within non-food, jewellery & watches shot to the top of the category growth table followed by household appliances, health & beauty and clothing. All other categories were in negative territory. Jewellery & watches continue to have a strong year after a negative month in July. Back-to-school brought some reprieve in children’s fashion and footwear, with clothing generally having its second month in positive territory. Household appliances remained one of the stronger categories with its 4th month of positive growth. Computer sales declined sharply, with mobile devices faring better. Health & beauty saw its second month of growth with skincare/suntan cream said to have performed particularly well. On the negative side, after 4 positive months, furniture fell into negative territory. Outdoor toy sales failed to materialise in August, resulting in toys and baby equipment being the worst performing category, having been positive in July. There was little appetite for house textiles while department stores reported seeing some benefit from clothing clearance. While the ‘other non-food’ category was negative, one ray of sunshine within the category was said to be DIY & gardening, which benefitted from last year’s weak comp. Sector read-across – Another weak month is unsurprising given the announcement of further CVAs, which appear to be an almost daily occurrence. Amongst the quoted players, valuations generally reflect challenging trading conditions with the devaluation of sterling which, if sustained, will likely result in further pressure in 2020 depending on hedging policies. We continue to favour roll-out stories which are less reliant on the industry backdrop, with our preferred BUY recommendations being JD Sports (1H20: 10 Sept), Watches of Switzerland (1H20: 12 Dec), boohoo (1H20: 25 Sept), B&M (1H20: mid-Nov) and WH Smith (FY19: 17 Oct).
ABF ASC BME DEBS CARD CRW GAMA GNC GRG HFD JD/ JSG KGF LLOY MKS WINE NXT RTN SCS SMWH TSCO WRKS WOSG SDRYN NBRNF
Wal-Mart's UK division, Asda, has reported Q2 and H1 CY2019 trading. Against tougher comparatives but boosted by Easter Asda delivered ex-fuel like-for-like (LFL) sales growth of 0.5% in Q2 making for H1 same-store trade of minus 0.3%. Whilst so, Wal-Mart reported a lower gross profit ‘rate’ and reduced operating income albeit the latter protected to some degree by cost savings in the UK. Asda remains a substantially profitable and asset backed business, one though that Wal-Mart wishes to exit to focus on other markets. As such, the business has every incentive to deliver the most robust possible financial performance as we anticipate an IPO, in which we would imagine substantial initial WalMart involvement, over the next 12-30 months. Accordingly, we expect Asda to continue to focus on narrowing the price gap, where it matters, with the discounters, and to seek enhance asset utilisation, on a par with the wider sector.
ABF MRW SBRY
With growth risks clearly tilted to the downside, and a global economy now growing persistently below trend in H1 2019, Central Banks in the Eurozone and the US are back on an easing path. While we see this path, together with domestic stimulus by China to protect its economy against the deterioration in the international trade environment, as broadly positive for commodities as an asset class, the benefits of such a shift in monetary conditions will not fall evenly, in our view. With the US bond market signalling the likelihood of a series of rate cuts to offset decelerating US growth and a weakened international trade environment, we maintain our previous strategy of selected precious metal and bulk commodity exposure, with a higher bias towards gold in the mix than previously. Base metals. Despite apparent progress at the Tokyo G20 Summit, the near-term outlook for base metals remains largely captive to the continued uncertainty regarding the outcome of resumed China-US trade talks, Copper remains our preferred non-ferrous metal in the medium to long term. Precious metals. The shift in the Federal Reserve’s positioning to an easing bias has made us more positive towards gold. Additionally, we continue to favour rhodium and palladium amongst the Platinum Group metals, as supply concerns still outweigh the threats of slowing auto demand. Bulk materials. We expect all types of iron ore to perform strongly well beyond this year, even if prices ease back from current highs. Chinese stimulus has added a demand component to supply driven market tightness, which should also be supportive for premium hard coking coal. Thermal coal, on the other hand, has been hard hit by low gas prices in Europe and Asia, adding a negative cyclical demand component to a commodity increasingly challenged by decarbonisation. We have not made any changes to our recommendations with most companies remaining in Buy territory, offering good value with forecast total returns bolstered by attractive dividend yields. As we have done all year, we continue to encourage a bias towards companies exposed to premium steel-making bulk materials. Rio Tinto, BHP and Anglo American stand out amongst the majors, the latter benefiting also from our positive outlook on palladium and rhodium. Gold stands to befit from Central Bank easing and in this regard Centamin is our preferred gold miner. We retain a positive outlook on copper but this is longer dated, suggesting muted upside for companies such as Glencore and Antofagasta in the near term.
ABF ACA AAL ANTO APTD BHP CEY CHR CHR CCC COST FDM FXPO GLEN KNOS MCRO NCC RIO SCT CELTF FDRVF
Mud & Muck, Associated British Foods, Smart Metering Systems, Plus500, MJ Gleeson, Market Highlights
ABF GNS CWK AUTO JE/ MONY GOCO WPP PSN AIR RMV GPE
ABF reported solid 3Q19 trading with constant FX sales rising 3% (2% reported) in the 9M’19. Ex Sugar, group revenues grew 4%.
Management’s outlook for the full year remains unchanged. Whilst trading has been soft at Primark over May, the exit rate improved in June and the outlook for margins in H2 feels more bullish with better buying now expected to offset FX. Elsewhere, the sugar business shows further signs of stabilisation. We expect no changes to market forecasts today. The details: Primark YTD sales +4% (cc) (H1: +4.4%) which was offset by LfL “declines”. No discrete LfL number has been disclosed for Q3, but we know that H1 LfLs were -1.5% and the consensus expectations was for LfLs of c. -2% in Q3 (comparatives were c. 150bps easier). Within the UK, total sales growth continued, although LfLs have been held back owing to unseasonable weather in May (but with an improving exit rate in June). For reference, LfLs in H1 were +0.6% (comparatives eased slightly over the period). The picture has been similar in Europe, with unseasonable weather affecting trading in May and recovering strongly in June. Performance was once again soft in Germany, but strong in Italy and Spain. No discrete LfL number has been disclosed for Europe, but for reference LfLs were -3.2% at H1. The US delivered “encouraging” LfL growth. Margins in H2 (at Primark) are still expected to be down (owing to FX) following H1’s strong performance, +190bps. At the interims, full year guidance for EBIT margins was to be “a little ahead”, however, owing to a higher offset from better buying the margin outlook appears more bullish and full year operating margins are now “expected to increase”. As flagged at the interims, retail selling space is expected to increase by 950,000 sq ft this year, adding c.6.1% of selling space this year. Space added YTD has been 800,000 sq ft, so the full year target remains in range. The details: Sugar, Grocery, Agriculture, Ingredients Against easier comparatives, Sugar Q3 sales appear to be stabilising and are now flat versus H1’s -11% following the reduction in EU sugar prices. Management expects lower Europe wide inventories to underpin higher spot prices this year. Elsewhere, the Grocery sales growth performance was +1% versus +3% in H1, but operating margins are expected to be ahead. Ingredients sales growth was +5% versus +5% at H1 and Agriculture growth has continued, following H1’s +8%, although margins, as flagged at H1, will be impacted by higher input and operating costs. Valuation Whilst we acknowledge earnings momentum is improving, the valuation on 17.6x CY19e PE, remains demanding in our view, given earnings growth forecast at just 6% (EPS 3 year CAGR). TP placed under review. HOLD maintained.
ABF has published a robust trading update for the 40 weeks to 22nd June which summarises the significant trading developments since the publication of the interim results in late April. The most important feature of the update, in our view, is the reiteration of management guidance for EPS to be “in line with last year”. We leave our FY2019 forecasts unchanged, looking for EPS of 134.7p. We view a September 2019F PER of 18.3x, falling to 16.2x in FY2020F, and an EV/EBITDA multiple of 9.3x, falling to 8.3x, as attractive for a high-quality set of assets that consistently generate high teens/low twenty percent ROCE and strong annual cash generation. BUY.
1H’19 earnings are broadly in-line with expectations. Group revenues rose 1% (+2% constant FX) while adj. operating profit of £639m (-1%) was in-line with our expectations. Adj. EPS of 61.1p was in-line with FY’18. Primark 1H’19 LfL sales fell 1.5% held back by Germany and lower footfall last November.
ABF, Go-Ahead, CMC, Market Highlights
ABF CMCX PLUS IGG ROG PSN WEIR DMGT HMSO GHGUY
ABF reports solid 1H’19 trading update, with sales growth in all business excluding Sugar. The company expects 1H’19 adjusted EPS to be in-line with last year as lower net finance costs offset a small decline in operating profit while FY'19 EPS are expected to be flat yoy.
Solid 1Q'19 trading update with group revenues up 2% yoy in constant FX. Primark sales grew 4% yoy driven by higher selling space partly offset by a modest decline in LfL growth. Primark’s operating margin rose and profits were well ahead of last year. Sugar continues to feel the negative impact from low EU and world sugar prices and sales fell -12% (-14% in constant FX) with lower revenue in Spain and the UK. Grocery delivered solid progress with a 3% sales rise in constant FX and improved operating profit margins. AB Agri and Ingredients also both posted solid revenue growth rising 5% and 6% in constant FX, respectively. ABF reiterated its FY'19 outlook for adjusted operating profit and adjusted EPS to be in-line with last year. We expect the shares to rally today on the back of a solid trading update with robust results at Primark despite weak November trading. ABF trades on a 15.4x cal'19E PE, 10.4x EV/ EBITDA and generates a 6.0% FCF yield.
FY'18 earnings are broadly in-line with expectations. Group revenues rose 1% (+3% constant FX) while adj. operating profit of £1,404m (+3%) was 4% ahead of Bloomberg consensus on £1,352m. Adj. EPS rose 6% to 134.9p. Primark 2H'18 LfL sales fell -2.7% in challenging conditions. Primark UK LfL sales fell ~0.6% in 2H while LfL sales in the Eurozone were pressured, particularly Northern Europe, due to unseasonable weather. Adjusted operating profit at Primark rose 15% to £843m with a 90bps rise in margin to 11.3%. Sugar adj. operating profit of £123m fell 51% due to lower EU sugar prices. Grocery, Agriculture and Ingredient profits are all ahead. ABF expects further growth in Primark’s selling space and growth from non-sugar businesses to broadly offset significantly lower profits at AB Sugar leading to expectations for flat adj. EPS in FY19.
On 11th October, Reuters reported that the Competition Commission of India (CCI) conducted raids on the Indian offices of brewers United Breweries, ABI and Carlsberg as part of a price-fixing investigation. CCI was tipped off by one of the three companies after it filed a leniency application with the regulator. The CCI can impose fines of up to 3x annual profit or 10% of annual sales, whichever is higher. Liberum view: Heineken's United Breweries, ABI and Carlsberg have 51%, 20% and 13% share, respectively, of the Indian beer market. The Indian alcohol market is highly regulated but is an attractive growth market for global brewers. An increase in regulations, if these allegations are proven, could hurt the brewers’ long-term prospects in the country.
ABF CARL HEIA BATS
ABF has reiterated its FY’18 outlook with progress expected in adjusted operating profit and adjusted earnings per share. FY'18 Primark sales are expected to be +5.5% at constant FX (+6% at actual rates), driven by increased selling space offset by a 2% decline in like-for-like sales. Primark performed well in the UK with FY'18 sales +6% ahead and LfL growth of +1.5% (flat in 2H’18 on a particularly tough comp vs. +3.0% in 1H’18), but was offset by weakness in Northern Europe. Primark's operating margin for FY'18 is expected to be approximately 11% compared to 10.4% in the prior year, implying margin in 2H'18 at around 12.0% will be well ahead of 1H (9.8%) driven by better US dollar exchange rates on purchases, better buying and a lower level of markdowns. Sugar's revenue and adjusted operating profit is expected to be well down vs FY17 due primarily to significantly lower EU prices while Illovo's profitability will be maintained. We see the solid FY18 trading statement as a good opportunity to pick up the shares after recent weakness.
ABF reported solid 3Q18 trading with constant FX revenues 3% ahead of year-ago (+2% reported). Despite a tough retail environment, Primark sales rose 7% on 8% new space growth, c.-1% LfL and +1% FX driven by stronger trading in the Eurozone and solid UK results with continued share gains. Primark now expects 2H margin will be well ahead of 1H and last year (FY'17 10.4%) due to better buying and better US$ rates. Sugar sales are 17% below last year and ABF now expects profits for FY18 & FY19 will be lower than previously expected. Overall, ABF’s outlook for FY’18 remains unchanged with progress expected in adj. profit and earnings. ABF offers compelling exposure to secular growth trends in retail over the next 10 years over which we estimate Primark can lift sales and profits by nearly 75%.
1H'18 earnings are broadly in-line with expectations. Group revenues rose 2% (+3% constant FX) while adj. operating profit of £648m (-1%) was inline with Inquiry Financial consensus on £646m. Adj. EPS rose 3% to 61.3p beating consensus by 1%. Primark 1H'18 LfL sales fell 1.5% held back by unseasonably warm weather in October. Primark UK LfL sales rose 3% in 1H partially offset by a decline in Northern Europe. Adjusted operating profit at Primark rose 5.6% to £341m, 3% below consensus although a 9.8% margin is broadly in-line with 1H17. Sugar adj. operating profit of £90m beat consensus by is 17% driven by cost savings. Grocery, Agriculture and Ingredient profits are in-line. In 2H, ABF expect acceleration in profit growth at Primark and growth from non-sugar businesses to underpin progress in both adj. operating profit and adj. EPS in FY18.
Tate appoints HORN as U.S. distributor for the Nutrition Industry | Heineken opens brewery in Mexico; optimistic on NAFTA | Essity to restructure production facility in Santiago, Chile | L’Oréal appoints China CEO to Executive Committee
ABF ABI BEI TATE HEIA OR 0ROY
Solid 1H trading, FY18 guidance reiterated despite a reduction in Sugar revenues driven by all other businesses. Lower interest and tax will drive a rise in adjusted EPS. Primark sales are expected to rise 9% (7% constant FX) driven by increased selling space with a 1% decline in LfL sales. UK LfL sales are +4% in 1H. Primark profit margin in 1H should be close to 1H'17 levels and profit growth is expected to accelerate in 2H. Significant pressure on EU sugar prices is expected to lead to a material decline in Sugar revenues only partly offset by increased production. ABF offers compelling exposure to secular growth trends in retail over the next 5-10 years. We estimate Primark can double sales and profits over the next 5 years. ABF trades on a cal'18E PE of 19.1x, cal'18E EV/EBITDA of 12.3x and offers a 1.7% dividend yield.
ABF reported solid 1Q18 trading with constant FX revenues 4% ahead of year-ago (+3% reported). Despite a tough retail environment, Primark sales rose 9% on 7% new space growth, flat LfL and 2% FX driven by the UK which continued to report a strong increase in LfL and market share. Primark's EBIT margin remains on track to meet FY17’s level of 10.4%. Sugar sales are 13% behind year ago and ABF now expects a revenue and profit reduction greater than previously guided due to significantly lower EU prices. ABF expect a 100bps reduction in the group's tax rate due to the lower U.S. tax rate applicable from the beginning of calendar 2018. Overall, the group’s outlook for FY’18 remains unchanged with progress expected in adj. profit and earnings. ABF offers compelling exposure to secular growth trends in retail over the next 5-10 years over which we estimate Primark can lift sales and profits by nearly 75%.
The consumer staples sector continues to trade on well above average historic and market average multiples despite a lack of earnings growth over 2014-15. This has been due to being perceived as ‘low risk' and cash generative with the ability to continue to pay and grow dividends. However cashflow cover of dividends has declined, and a further round of emerging market currency devaluations could have a severe impact on the ability to grow dividends unless they can grow earnings in the developed world. In the short term the performance of the sector is likely to be overshadowed by the potential interest rate increase in the US. We would have an in-line weighting in the UK consumer staples sector. Within that we remain positive on the tobacco subsector and Hilton Foods Group and retain the Sell rating on Associated British Foods. We move PZ Cussons from Sell to Hold
Indices and Markets
Primark LFL sales improve but not clear if done at expense of lower margin.
No change to FY 15 estimates.
The stock is trading at a significant valuation premium to other FMCG stocks despite offering no EPS growth over FY 2015-16 and in our view short term earnings momentum will remain negative. Despite this there is clearly a positive investment case to be made based upon sustained roll out of Primark. However, we believe the current valuation is already implying double digit growth for the next decade at Primark making it difficult to see further upside.
