Associated British Foods, Mobico, Warpaint London

BUY: Associated British Foods (ABF)

Progress is being made across divisions as supply chain problems recede, writes Christopher Akers.

Associated British Foods shares rose by 9 per cent after the Primark owner beat market expectations. The company’s adjusted operating profit grew 39 per cent to £951mn in the half-year period, which chief executive George Weston said was down to “the restoration of some normality in our markets and supply chains”. Analysts had expected profit growth of a quarter. 

Revenue growth was driven by a 6 per cent uplift at Primark, which benefited from new store openings and price increases put through last year. The division increased profit by 45 per cent to £508mn and widened its operating margin from 8.3 per cent to 11.3 per cent year on year.

The lack of an online delivery option may not have helped sales during the pandemic, but avoiding the temptation to make a big move into ecommerce seems to be paying off. The company’s click-and-collect service is being rolled out across all stores in England, Scotland and Wales after an encouraging trial, with management finding that the model “is satisfying unfulfilled demand from both new and existing customers”. 

Revenue contracted at the ingredients and agriculture units due to destocking and animal feed demand headwinds, respectively, but the outlook is cheerier across non-retail divisions as profits and margins rose across the board. Profit at the company’s second-biggest unit, grocery, were up by a third, aided by better US demand and lower losses at the Allied Bakeries brand. The sugar arm, where profit surged by 29 per cent, is benefiting from much-improved production despite the impact of wet weather. 

The balance sheet remains resilient, with the leverage ratio down to 0.9 times. Net cash before lease liabilities climbed 14 per cent to £668mn. 

After pointing to improvements in profitability and cash generation in a January update, the company now thinks it is “on track to deliver significant growth” over the full year. The margin is expected to rise at Primark, where the focus is on improving volumes. The chunky increase in the interim dividend signals confidence in a brighter outlook. 

Liberum analysts argue that the “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 per cent via dividends and buybacks over the medium term”. 

The shares trade at 13 times forward consensus earnings, undemanding in the context of solid results and attractive growth prospects. The company is well-placed to deliver further progress.

SELL: Mobico (MCG)

The owner of National Express has been hit by a wave of “one-off” problems, writes Jemma Slingo.

There is a lot to worry about in Mobico’s full-year results. Adjusted operating profit fell by 15 per cent to £169mn in 2023 as a result of cost inflation and a reduction in Covid subsidies. The post-pandemic bounceback is officially over, it seems.

The statutory figures were significantly worse, with the company banking an operating loss of £21.4mn. Restructuring costs and driver shortages in North America dragged things down, but the main adjusting item was a £99.2mn onerous contract provision in the German rail business. The latter was also responsible for the unsettling delay to Mobico’s full-year results.

The group has rolled out a series of cost-cutting measures. Chief financial officer James Stamp is stepping down, to be replaced by Helen Cowing, who is not joining the board. 

Mobico is also very highly leveraged, with net debt/Ebitda sitting at three times, meaning dividends have been suspended again. The potential sale of the North American school bus business continues to rumble on, which could improve the balance sheet. However, analysts have warned that a quick sale is likely to deliver poor value. 

Adjusted profits from the North American business fell by 60 per cent to £27.1mn in 2023 and it was lossmaking in statutory terms. It was a similar story in the UK and Germany, with only Spanish subsidiary Alsa showing obvious improvement.

Revenue in the first quarter of 2024 was up by 3.5 per cent, with Alsa continuing to do well. Adjusted operating profit for the year is expected to come in at £185mn-£205mn, which would also mark an improvement on 2023. However, there is a lot of operational uncertainty at the moment and Mobico’s balance sheet is increasingly stretched.

HOLD: Warpaint London (W7L)

Trading is impressive, but the valuation prices in the growth narrative, writes Christopher Akers.

Cosmetics company Warpaint London posted record annual results as it made progress with new and existing retail customers across its markets, with investors rewarded with a 27 per cent increase in the full-year dividend. 

Revenue was up 61 per cent in the EU, the company’s biggest market, where there was “significant further expansion” with its brands at the Normal, Etos and Wibra chains. Growth of 18 per cent was recorded in the UK, as Superdrug was added to a client roster which includes Tesco and Boots. Products were rolled out to a further 387 CVS stores in the first quarter of the new financial year in the US, and Walmart put through a chunky Christmas order. Sales rose 37 per cent in the US in the year, a market where the company is starting from a much smaller base. 

Over 90 per cent of the company’s revenue is posted by the in-house W7 and Technic brands. The performance was helped by a more than doubling of online sales to £6.2mn. Prices haven’t been raised since January 2022, positioning the company well in this macro climate. 

Gross margin climbed by a robust 350 basis points to 39.9 per cent. 

Backing up growth is a resilient balance sheet. With no debt in the mix, the company hasn’t seen any direct financial headwinds from the higher interest rate environment. Investment in stock meant inventory was £28mn at the year end, up by over £9mn from 2022, helping to avoid supply headaches. 

Impressive trading has continued into the new financial year, with revenue up 28 per cent in the first quarter and margins ahead of the full year postings. But the shares are rated at 22 times forward consensus earnings, a level which indicates that the market is up to speed with events.