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Equities look ahead – Associated British Foods, Unilever, Burberry

A look to company earnings next week.

Source: Bloomberg

Associated British Foods (first half earnings 19 April)

The engine of growth for Associated British Foods (ABF) has long been Primark. Now after recent data on wage growth has confirmed that UK shoppers’ pay packets are shrinking in real terms, we could see a boost for the cheaper end of the market, with Primark being a beneficiary. Total retail sales volumes were down 1.4% in the three months to February, and inflationary pressures could push this yet lower. Primark’s growth is not confined just to the UK. A January update said that stores in Europe and the US enjoyed strong trading in the 16 weeks to 7 January. The group remains on a forward PE of 22, which looks rather expensive and leaves it vulnerable in a broader market correction, but longer-term the growth potential looks healthy.

The technical picture is less compelling from a bullish perspective, with the shares having steadily lost ground since the peak at the end of 2015, near £36. Nonetheless, 2016 and early 2017 saw the price bounce at £23.35, and a recent surge has put the price back on track to challenge the March high at £27. A break of this would clear the way to £27.50.

Unilever (Q1 trading statement 20 April)

For Unilever, the main task at the moment is keeping investors happy. It has started to do this with a decision to sell off parts of its underperforming food businesses. It is also looking at other ways of slimming down costs, including a re-examination of its dual listing, which could give it greater flexibility when making acquisitions. Undoubtedly some investors were not happy with the rejection of Kraft’s bid, and so Unilever will have to look at ways of returning cash. The new €5 billion buyback and a hefty boost to the dividend will help, with increases to payouts likely to be a theme in future updates. This time around, investors will want to see core businesses such as personal care do well, along with indications of progress on margin improvements.

The peak here is still £40.85, with the price having hit this level twice in the past month. A failure to break higher would suggest a return to £39 or £38.08, with the latter marking the peak from October. A close below this level would raise the prospect of a move back to the 200-day simple moving average (SMA), currently £35.26.

Burberry (Q4 trading update 19 April)

Burberry is expected to report an improvement on same-store sales next week, with Deutsche Bank expecting 6% growth. Sales have been improving steadily since the second quarter of 2016, with noticeable improvements in China and East Asia. Recent good performance from rival Louis Vuitton Moët Hennessy (LVMH) has also pointed towards an improvement at Burberry.

The company’s rally since June has been as remarkable as its decline during 2015. Fuelled by a weaker pound, and reviving expectations of demand in East Asia, the shares are now only 10% lower from their 2015 peak. The rally remains intact, even if it has pulled away from the steady trend off the 2016 low. We may have seen a lower high at £18, but a lower low has yet to materialise, and this would likely need a close below £17.10. A break back above £18 would head towards the March peak at £18.36, and above here the next target is the 2015 peak at £19.29.

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