Cube Midcap Report (24 Feb 2020) – Virus panic spreads #ABF

Cube Midcap Report (24 Feb 2020) – Virus panic spreads #ABF

Good morning!

Equity markets are taking a hit this morning as fears about the Coronavirus are taken more seriously.

Not by me, though. I remain very complacent with respect to my own portfolio – I have no plans to sell anything. My main exposure to this problem is through my holding in Burberry (BRBY).

Rightly or wrongly, I remain an optimist in the long-term. Though I accept that company results will take a hit in the short-term.




Trade alert: I am now long the FTSE, by shorting a put expiring in September 2020. The breakeven level is 6422. I’ll write an explanation for this trade later.


Associated British Foods (ABF)

  • Share price: £25.375 (-1.8%)
  • Market cap: £20.1 billion

Pre-Closed Period Trading Update

ABF owns Primark plus a wide range of grocery and ingredients businesses – here’s an overview.

Today’s update says that the outlook for the full year (to September 2020) is unchanged. According to consensus forecasts, PBT is forecast to increase to £1.5 billion.

IFRS 16 – Primark’s results will be impacted (it’s a retailer, so that makes sense). The other businesses in ABF will not be materially affected.

Currency – strong GBP in H1 will result in a £6 million translation loss for the H1 result. The currency translation loss will be bigger in H2, if currency rates don’t change. I would ignore this, personally.

Trading outlook – sales and adjusted operating profit will increase, in line with forecasts. I note that the ABF share price is significantly outperforming the FTSE today (ABF only down 1.8%, while the FTSE is down 3.3%).

Cashflow/capex in H1 will be similar to last year. Net cash of £800 million.

Coronavirus – ABF is a global group, with food operations in China. Some of its factories are operating “at reduced capacity due to labour and logistics constraints”.

Primark is “well stocked with cover for several months”, since it stocked up in advance of Chinese New Year, as usual. Looking ahead:

We are working closely with our suppliers in China to assess the impact on their factories and supply chains and their ability to fulfil our current orders. If delays to factory production are prolonged, the risk of supply shortages on some lines later this financial year increases. We are assessing mitigating strategies, including a step up in production from existing suppliers in other regions.

Lots of detail is given on various parts of ABF, but I think I’ll focus on Primark since it’s the closest one to home, and there is read-across to many other companies we look at.

Key points about Primark in H1:

  • sales up 4.2% at constant FX (2.5% at actual FX)
  • total like-for-like sales flat
  • UK LfLs down, international LfLs up.
  • UK market share growth with lots of new selling space
  • total adjusted operating profit marginally down due to falling margins (whether or not you include the effect of IFRS 16)

The stronger pound has hit margins:

Purchases this year were contracted at a much stronger US dollar exchange rate than for purchases last year, but the effect was substantially mitigated by both reduced markdowns and reductions in the costs of goods, primarily lower materials prices.

Foreign exchange contracts are in place for most of the second half purchases, at an exchange rate in line with those for the second half last year. As a result, we expect second half margin to be in line with the same period last year, and so still expect margin for the full year to be only a small reduction on that achieved last year.

I wonder what happens in FY 2021 – if the FX contracts expire and rates are unchanged, I guess margins will start to really hurt.

My view

To me, this is the epitome of a solid FTSE-100 stock. It has been churning out a solid stream of profits for as far back as you can look up records. ROCE & ROE have been at good, acceptable levels too (both generally above or around 10%).

I’m unlikely to invest in it as a single-stock bet, but it’s the type of company which helps me to justify taking long positions in the FTSE (as I did this morning!).



I’m sorry I didn’t get to cover anything else today. Back tomorrow, hopefully with a better effort!




Wordpress (2)
  • comment-avatar

    That’s an uptick from me before the report has really started simply on the basis of “the Midcap Report will be here every day this week”

    Brutal out there this morning (and I’m not talking about the weather).

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