Associated British Foods (Q4 update 10 September)
Associated British Foods (ABF) stuck resolutely to its full-year outlook at the third quarter (Q3) statement, despite a dismal performance at the growth engine of Primark and a worsening outlook for sugar. Improving margins do provide a foundation for optimism, but the Primark driver is not seeing the growth in the US that has been hoped for, while low sugar prices thanks to a supply glut will hold back profit in the coming year. Primark needs to double the number of its US stores to maintain profitability, but so far promising new sites are not forthcoming. How long investors will remain content with performance remains to be seen, but for now Primark’s contribution continues to counteract the weakness in the food divisions.
At 16.4 times earnings the firm is now the cheapest it has been since 2013, and is well below the five-year average forward price-earnings (PE) ratio of 24.7. It also trades in line with its peers, compared to a more normal two-year average of a 15% premium.
ABF shares have not had much luck of late, and are currently struggling to hold vital support around £22.91. Below this the next level is £21.92. Bullish sentiment is likely to remain in check until we move back above £24.00, and even downtrend resistance from the October 2017 highs comes into play at £27.00.