Cube UK Report (20 April 2021) – ABF sounds caution on reopening trade

Cube UK Report (20 April 2021) – ABF sounds caution on reopening trade

Good morning, it’s Roland here with today’s Cube Report.

It’s a fairly busy day on the newswires. I’ve selected four stocks I’d like to take a look at this morning, two of which form part of my own portfolio.

  • Associated British Foods
  • Group
  • Avast
  • Tatton Asset Management

Without further ado, let’s begin.

Associated British Foods

  • Stock data should display here.
Market cap £19.5bn
RNS Interim results
Writer disclosure No position

This FTSE 100 group includes agribusiness, grocery brands such as Twinings, and the Primark fast fashion chain. Associated British Food’s conglomerate structure and family ownership makes it a double rarity in the big cap index. But historically, this stock has been a good advert for the benefits of investing alongside family owners. Until the pandemic struck, ABF’s dividend hadn’t been cut for 20 years, during which time the payout had tripled.

That record came to end last year, in part because of the group’s growing dependence on Primark. This high street brand (which doesn’t trade online) generated 65% of operating profit in 2019. This made life tough in 2020. ABF says it lost £3bn in sales and £1bn in profit as a result of Primark store closures. This loss was not offset by strong growth in the group’s food businesses.

ABF’s half-year numbers for the six months to 27 February show the scale of the impact of lockdowns in the UK and other markets where Primark operates:

  • Revenue down 17% to £6,313m
  • Adjusted pre-tax profit down 50% to £319m
  • Adjusted earnings down 59% to 25.1p per share
  • Interim dividend reinstated at 6.2p per share (a 50% cut from the 2019 interim payout)

ABF’s conservative balance sheet meant that the company was not forced into dilutive equity raises or costly new loans last year. Indeed, the group reported net cash (excluding lease liabilities) of £705m at the end of February, despite capex of £382m during the half year.

Alongside the resumption of dividend payments, ABF has also said that it will repay all furlough cash received in the UK and elsewhere — £121m in total.

Today’s outlook statement sounds cautious to me, warning that grocery performance could weaken while Primark has not yet reopened in some markets.

My view

I considered buying into ABF when the market crashed last year, but hesitated too long and missed the opportunity to pick up the shares cheap. They’ve since bounced strongly and are trading broadly in line with pre-pandemic levels.

Although this prices the stock on a lofty 28 times 2021 forecast earnings, this multiple falls to 18 for 2022.

I think the stock is probably fairly priced at present. Given the strength of its balance sheet and the defensive nature of its group businesses, I don’t see any reason why ABF shouldn’t stage a full recovery. I continue to view this as a buy-and-forget stock, and regret not buying last year. Group

  • Stock data should display here.
Market cap £1.5bn
RNS Q1 trading statement
Writer disclosure Long

A short and rather ugly trading update from price comparison group Moneysupermarket.

Results during the first quarter of 2021 have suffered as the comparative period is Jan-Mar 2020, much of which was pre-pandemic.

Revenue fell by 20% to £85.5m during the first quarter of 2021, compared to the same period last year. All four of the group’s main segments saw revenue decline:

  • Insurance down 21% to £41m
  • Money down 26% to £18.1m
  • Home services (utility switching) down 15% to £16.6m
  • Other (e.g. B2B) down 14% to £9.8m

The company describes the performance as in line with expectations, which I think is probably fair. These quarterly figures do not seem out of kilter with last year’s results to me, given that 2021 has been spent under lockdown until very recently.

In terms of trends, the company says that insurance performance was broadly consistent during the quarter, but money (credit products) saw a gradual improvement in February and March. Energy performance is also said to have improved.

The group’s Decision Tech unit “continued its double-digit growth” in B2B and B2C. However, “a large volume B2B partner” has given notice from July 2021. This partner contributed £15m of revenue and “low single-digit million” EBITDA last year. Not great news.

My view

I hold Moneysupermarket in my own portfolio and believe the shares are probably attractive at current levels. Despite the pandemic, this business generated a 35% return on capital employed last year, with a 25% operating margin. It has no material debt and excellent cash conversion.

As life returns to normal, I expect trading to improve. However, I’m concerned that the price comparison sector in general has probably gone ex-growth. I believe Moneysupermarket’s data and technology should support new avenues of opportunity, but these have yet to make a material contribution to the business.

Moneysupermarket didn’t cut its dividend last year. For now, I’m happy to collect the 4% yield and wait for new CEO Peter Duffy (ex-Just Eat) to deliver results.


  • Stock data should display here.
Market cap £4.9bn
RNS Q1 trading update
Writer disclosure No position

This Czech-based cybersecurity software group joined the FTSE 100 last year, as it enjoyed a work-from-home surge. The stock has since cooled, but this business is increasingly on my radar as a potential buy.

Today’s first-quarter statement looks fairly reassuring to me. Revenue rose by 10% to $237m during the first quarter. Adjusted EBITDA increased by 10% to $133.7m, indicating a stable EBITDA margin of 56.4%.

Growth was reported in both the Consumer Direct and SMB divisions. Leverage fell to 1.1x adjusted EBITDA.

Guidance for the year ahead is for revenue growth at the upper end of the 6%-8% guidance range. Margins are expected to be flat, due to planned R&D and marketing spend.

My view

I’m increasingly interested in this business. Avast generated an operating margin of nearly 38% last year, together with ROCE of 20%. Cash conversion is strong and the stock does not look overly expensive to me, with a trailing free cash flow yield of over 6%. The dividend yield of 2.5% is worth having, and could potentially grow strongly.

That said, I do have a couple of concerns. Avast’s business model is built around the freemium concept, providing free anti-virus software and then upselling customers on other security-related services. Management face the ongoing challenge of converting free users into subscribers who will generate recurring revenue.

I wonder if developing brand loyalty might be tougher than for some better-known (US) brands. This isn’t such a sticky product as — for example — accounting software.

Despite this, I have a favourable impression of Avast and plan to look into the business in more depth.

Tatton Asset Management

  • Stock data should display here.
Market cap £217m
RNS FY trading update
Writer disclosure Long

I’ll finish up with a quick look at today’s update from Tatton Asset Management, which provides a range of services for UK financial advisers. I have a small position in TAM in my own portfolio.

Today’s update has lifted the stock by 10% at the time of writing. It’s not hard to see why:

  • “The Board expects FY21 results to be ahead of all analysts’ forecasts.”

That’s a nice start to a trading update. So what does it mean?

One of the services Tatton offers its clients is fund management. Both inflows and market performance have been strong over the year to 31 March, as I’d hope:


Source: Company

Mortgage activity is also said to have been strong, thanks to the stamp duty holiday. Gross lending rose by 2% to £6bn during the second half, giving a full-year total of £11bn. I wonder if this increase will be sustainable?

My view

Tatton’s share price has risen by around 60% over the last year, leaving the stock trading on around 28 times 2022 forecast earnings. However, the company’s performance has been strong and its metrics are impressive. Over the last 12 months, operating margin and return on equity have hovered around 45%. The dividend yield remains worthwhile, at c.2.5%.

I’m not sure how cyclical Tatton’s business will prove to be, but it appears to be well run, profitable and cash generative. Another positive factor for me is that CEO Paul Hogarth is the largest shareholder, at 18%.

Anecdotally, I’ve also heard positive comments about this business from professionals operating in this sector.

I have a small position in Tatton and I probably won’t buy more. But I’m certainly happy to let this one run for now.

That’s all for today. I should be back with you on Thursday.




Wordpress (1)
  • comment-avatar

    Many thanks for your post Roland. With Graham’s one of yesterday that makes 8 shares covered in 2 days – must be a record for this site. Long may it continue

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