Despite another downbeat day on the UK stock market, Associated British Foods, owner of Primark and British Sugar, managed to recover some of its recent losses.
The company warned earlier this month that falling sugar prices would hit the division's profits, albeit offset by continued growth at Primark. With the subsequent share price fall, analysts at Credit Suisse believe the shares now look good value. They moved their rating on ABF from neutral to outperform, with a £30 target price, saying:
Historically, Primark has been the key to the share price, but less so the earnings as sugar profits fell over 3 years from over £500m to under £100m. But sugar is now under 10% of the earnings with profits we believe at their trough; Primark is over 60% of profits and now the key to earnings as well.
Indeed, 2015/16 is lining up to be a year of significant earnings per share growth as Primark openings accelerate as the group enters the US, ingredients continue their recovery and sugar profits also improve smartly as the lower beet price feeds into earnings. We have 15% earnings per share growth.
The fall in the share price has taken the implied Primark multiple from over 30 times to 24 times today (based on 2015/16 estimates). As emerging markets continue to slow, so growth stories in the developed world take centre stage, and it is hard to find a better structural growth story than Primark, in our view.
ABF ended 116p higher at £26.79, the biggest riser in the leading index.
Overall, though, the FTSE 100 was on the slide again, down 23.88 points at 6622.72. Investors were cautious ahead of this week's European Central Bank meeting and US non-farm payroll figures. Geopolitical tensions played a part, of course, with the continuing pro-democracy protests in Hong Kong, worries about the repercussions of air strikes on Isis, and the sanctions on Russia over Ukraine. There was even a report, later denied, of possible capital controls by Russia's central bank, which weakened the rouble further.
There were renewed concerns about the US economy, with consumer confidence falling unexpectedly in September. Earlier came a disappointing Chinese purchasing managers index, down from a prelimary estimate for September of 50.5 to 50.2.
Retailers came under pressure after Next warned it might have to reduce its profit forecast if the current warm weather continued. The news sent its shares down 260p to £66.05 while rival Marks & Spencer fell 10.8p to 404.6p.
Housebuilders slipped back after Nationwide said UK house prices fell by 0.2% in September, with Persimmon down 9p at £13.34.
And chip maker Arm fell 18.5p to 906p after analysts at Bernstein cut their rating from market perform to underperform.
On the positive side Royal Bank of Scotland rose 6.8p to 368.2p after it said £800m of provisions would be released as economic conditions had improved.
Testing equipment specialist Intertek added 54p to £26.21 as it appointed Andre Lacroix from Inchcape as its new chief executive to replace the retiring Wolfhart Hauser.
Among the mid-caps Melrose rose 10.3p to 247.7p after the industrial group announced the purchase of US heating component specialist Eclipse for $158m in cash.
But Al Noor Hospitals lost 71p to £10.18 after the UAE healthcare group's founder Kassem Alom arranged to sell 5m shares at £10 to £10.50 each.
Interdealer broker Icap dropped 8.4p to 387.3p as it warned first half revenue would be around 10% lower than a year ago after poor trading volumes.
Lower down the market, Finnish paper and packaging group Powerflute put on 29% to 47p after its agreed to pay €81m to buy coreboard maker Corenso from Stora Enso Oyj.
But green technology company TEG slumped 50% to 2.4p after it made a half year operating loss of £1.17m and said it needed to raise new funds to secure its future. Chairman Leo McKenna said:
The group remains at risk unless secure additional financing is achieved, but on the basis such funding can be secured, the board is confident [it] has a positive future.
Analysts at its broker N+1 Singer said:
TEG released interim results for the first half of 2014 which show increasing profitability from the Plant Operations division, but lower revenues and increased losses from the Engineering, Procurement & Construction division. The new chairman's operational review is almost complete, and the board believes that the group's future efforts and resources should be focused on its more profitable and predictable Plant Operations division. Further funding will be required, which is likely to be sought through both project finance and equity. To this end, discussions have commenced with TEG's largest shareholders. Our forecasts remain under review.
