Investors’ Chronicle: Associated British Foods, Wickes, Fevertree Drinks

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BUY: Associated British Foods (ABF)

Primark, the discount clothing retailer, and sugar are set for a boost in 2024, writes Christopher Akers.

Associated British Foods raised its full-year profit guidance on the back of price rises, and reiterated its expectation that retail and sugar profitability will significantly improve in 2024.

The Primark owner said operating profits for the year to September 16 would be “slightly better than previous expectations” despite retail footfall being hit by poor weather conditions in its fourth quarter. Adjusted operating profit was £1.4bn in the 2022 financial year. 

Primark’s performance is being helped by price increases, lower freight and material costs, and a weaker US dollar, with retail like-for-like sales growth coming in at 9 per cent for the year, taking revenue to £9bn. Further store openings have taken the estate to about 430 sites. But the retail operating margin, expected to come in at around 8 per cent, has been impacted by “higher than expected stock loss from stores across the estate and a modest amount of German restructuring costs”.

Management pointed to “strong sales growth” in the food division, with grocery trading ahead of company expectations as brands in the US put in a solid shift. Sugar is expected to make a “substantial improvement in profitability” next year, aided by an improved sugar beet crop in the UK.  

Analysts at investment bank Shore Capital raised their earnings per share forecast for 2024 by 8 per cent to 165p and argued that ABF is undervalued, “especially in a higher base rate environment”. 

BUY: Wickes (WIX)

The home improvement retailer still looks good in the long run, despite its issues, writes Mitchell Labiak.

On its own terms, Wickes £7.4mn IT cost was a small price to pay for its divorce from Travis Perkins. However, when combined with a rise in other backroom costs, including IT investment, bonus payments and “modest inflation in support centre costs”, it added up to £20.8mn. It was enough to slash its pre-tax profit for the six months to June 30 by almost 40 per cent.

The fact that dividend payments remained at 3.6p per share is perhaps a sign Wickes is confident in its underlying performance. After all, revenue did grow — albeit marginally. The drop in DIY sales was offset by growth in what the company calls “DIFM” (do-it-for-me), where customers who buy items such as kitchens and bathrooms get them built as a service.

Wickes believes things will improve, saying it is “comfortable with full-year consensus expectations [of] adjusted pre-tax profit of £45mn to £48mn after the impact of SaaS IT investment costs”. According to the consensus of analyst forecasts from FactSet, pre-tax profit will grow to £66mn by the end of 2025, while earnings per share will reach 21.1p. It would give the stock a price to 2025 forecast earnings ratio of 6.7 times, which is good value if those forecasts prove correct.

The big bear point is that its net debt is 293 per cent of its equity. The bulk of its liabilities are its leases for shops, which enables it to trade, but Wickes is aware of its need for a healthier balance sheet and is filling up its coffers with cash accordingly. It’s a prudent move and a trend we hope will continue.

HOLD: Fevertree Drinks (FEVR)

Cost headwinds are starting to moderate, but are still dragging down performance, writes Christopher Akers.

Premium tonics supplier Fevertree Drinks concocted a very mixed set of half-year results. The company delivered its highest ever market share by value in the UK, boosted sales by 40 per cent in the US, and raised its cash profit margin guidance for next year above the market consensus to 15 per cent. But full-year revenue guidance was cut from a range of £390mn-£405mn down to £380mn-£390mn, which management pinned on “the vagaries of the British summer weather” and its change in Australian distribution model. And the huge slide in pre-tax profits was driven by continuing cost headaches as the asset-light business model remains under pressure in this high-inflation environment.

Growth across the Atlantic far outstripped postings elsewhere, although a £3.3mn exceptional charge resulting from production headaches took some of the shine off the US performance. Revenue was up just 1 per cent in the UK to £53.8mn, with off-trade sales flat. There was better news in Europe, where the top line grew by 7 per cent to £56.1mn as share was taken from other premium brands. Revenue in other international markets fell by more than a third to £9.6mn because of an inventory buy-back in Australia and the refresh of the business set-up there.

Cost headwinds remain a painful thorn in the company’s side. Analysts at investment bank Liberum pointed to double-digit percentage increases in packaging, ingredients and filling fees. Management highlighted “materially elevated glass costs”, a big issue considering around 80 per cent of the company’s sales rely on glass bottles. It is hoped that a potential new contract for glass supply will bring down costs significantly in 2024, but this remains to be seen. 

The impact of all of this was seen in the 670-basis points contraction in gross margin to 30.7 per cent in the half, with price increases unable to fully pick up the slack.

But, on the plus side, there is evidence of some softening of cost pressures. Falling energy and freight costs helped the company reiterate its gross margin guidance range of 31 to 33 per cent for the full year, and the bump in cash profit margin guidance was a welcome surprise.

The premium forward earnings valuation of 47 times, according to the consensus view on FactSet, is too punchy given outlook volatility.