Associated British Foods – a business camouflaged in sugar and Ovaltine

Technically interesting perhaps but still very highly price on near term earnings estimates.

My last words on this magnificently highly valued share (the share price was then 3,088p) amounted to a question: “A chart worth inspection; a potential momentum buy?” Well now we know the answer! There was momentum but as it turned out, it was downward momentum, not the skyward, northern sort. The share price came tumbling down, like the walls of Jericho in the old spiritual, in what looks like the highest volume of activity over a year. The share price is now down to 2,712p (last seen) having fallen 12% from 3,088p and over 17% down from the previous peak of 3,293p. It serves to remind us of the old market folk lore wisdom that highly priced shares brook no disappointment.

Its complexity is characterised by the sugar, agricultural ingredients to fashion et cetera conglomeration of activities of a company where you have to wade through a load of reportage on fairly low margin and cyclical stuff like sugar, groceries and ingredients, before coming to the account of the affairs of the Primark retail business: the activities which are responsible for the share’s enormously high valuation; a business camouflaged in sugar and Ovaltine on the outside.

There is absolutely no economic synergy between these businesses and Primark. The fact that they are conglomerated together is an indication of a somewhat old fashioned and by contemporary standards, the idiosyncratic nose of the punting entrepreneur of several decades ago; rather than the cut and trim of the modern private equity style corporation modeller; that of a Lord Hanson and Pearson Group of yesteryear. It is a business management style that looks as though it is hinged to a corporate, hunter gather style of business accretion, driven a bit by the instinct of horse breeders or old fashioned Greek shipping tycoons; except of course that they both have potential for synergy.

My long standing philosophy on this company is to forget it and, if you want a fashion retail share, go to the contrasting simplicity of NEXT or Marks & Spencer. So why do I expend my energy on this perplexing and provocative equity? Sorry ladies, but understanding women’s fashion is hard enough, so understanding a business whose sales are 40% fashion retail, 15% sugar, 25% groceries, 9% agricultural produce and the balance of sales ingredients, is considerably more taxing. If you are a private investor my advice is to find simpler shares to consider.

Anyhow, for what it’s worth, I draw your attention to my observation that this share seems to be standing on a possible four year share price support level of 2,712p (last seen) and invite ‘technical’ operators to have a look for themselves. The shares reached a peak of 3,293p last December and are now 17.7% lower at 2,712p last seen.

On the basis of market consensus estimates, the shares are now selling on a prospective price to earnings ratio of 28 times and a forecast, estimated dividend yield of 1.3%. Earnings are forecast to be lower by 4% this year – to September 2015 – but to rise by 10% next year. Since there is little to entice buyers by way of earnings growth short term, one analyst has described the current share price as “option” money on potential growth in the US and thus attractive. History tells us that the market has many examples of retailers successful in the UK failing in the US. It is something that simply cannot be taken for granted. It is not a share for me because of the rating, lack of estimated near term growth and the reliance on an assumption that the US market will be an easy one to crack. However, it may have interest if you are a technical analyst. Have a look at the share price chart.