ASSOCIATED BRITISH FOODS

A Brief introduction, financial analysis, peer comparison, and recommendation on the listed
stock of Associated British Foods Stock Analysis
 Executive Summary

Associated British Foods is one of the top 100 companies listed on the London Stock Exchange.
It is a well-diversified company with a presence in multiple geographies. The group has earned
revenue of 15.8 billion pounds with adjusted profits of 1,406 million pounds. It has provided a
dividend of 46.35 pence out of the Earning per share of 137.5 pence. It is also on a growth path
and invested an amount of Pound 837 million. This report discusses a brief introduction of the
company along with the segment it operates in, an analysis of financial ratios, and the investment
rationale for the stock. (it is not an introduction, write thesis statement in introduction part)

(It should be approx 10% of the total word count)

(In executive summary, write a brief summary of the entire report)

 Table of Contents

EXECUTIVE SUMMARY .......................................................................................................... 3

TABLE OF CONTENTS ................................................................. 4 (NOT A PART OF TOC)

INTRODUCTION......................................................................................................................... 6

ABOUT THE COMPANY ........................................................................................................... 6

BUSINESS SEGMENTS ................................................................................................................... 6

Grocery:................................................................................................................................... 6
Sugar: ...................................................................................................................................... 7
Agriculture: ............................................................................................................................. 7
Ingredients: .............................................................................................................................. 7
Retail: ...................................................................................................................................... 7
IMPORTANT RATIOS AND ITS RELEVANCE .................................................................................... 7
Liquidity Ratios........................................................................................................................ 8
Current Ratio:.......................................................................................................................... 8
Quick Ratio: ............................................................................................................................. 8
Operating Cash Flow Ratio: ................................................................................................... 9
Net Cash per Debt: .................................................................................................................. 9
ACTIVITY RATIOS......................................................................................................................... 9
Asset Turnover Ratio ............................................................................................................... 9
Inventory Turnover Ratio ...................................................................................................... 10
PROFITABILITY RATIOS .............................................................................................................. 10
Profit Margin Ratio ............................................................................................................... 10
Return on Equity Ratio .......................................................................................................... 11
Return on Capital Employed ................................................................................................. 11
MARKET RATIOS ........................................................................................................................ 11
Earnings per Share ................................................................................................................ 11
Price Earnings Ratio ............................................................................................................. 12

CONCLUSION & RECOMMENDATIONS ........................................................................... 12

 COMPETITIVE ANALYSIS ............................................................................................................ 13
LIMITATIONS IN THE ANALYSIS .................................................................................................. 13

REFERENCE LIST .................................................................................................................... 13

APPENDICES ............................................................................................................................. 14
 Introduction

Associated British Foods, a conglomerate operating out of the UK and based in London, is a
company involved in the food ingredients, manufacturing, and other related activities. The
company primarily deals in Retail, agriculture, Ingredients, Sugar, and grocery. A few of its most
notable and widely known brands are Twinings, Ovaltine, Tiptop, Kingsmill, Jordans, and
Yumi’s, etc. It is well-diversified geographically and boasts the presence in 52 countries and
mainly in the Asia Pacific, the Americas, the UK, and Africa, etc. As per an annual report
published for 2019, the company reported group revenue of Euro 15.8 billion and adjusted profit
before tax at Euro 1.406 million

About the Company

Business Segments

The company primarily deals in 5 major sections; Grocery, Sugar, Agriculture, Ingredients, and
Retail.

(In introduction, put emphasis on the nature of its business and a brief overview of its
financial performance and position over the past four years. Business segments are not
needed in detail)

Grocery:
In the grocery department, it has multiple well-recognized brands across nations. The most
popular ones are Twinings, Acetum, AB World Foods, Allied Bakeries, and Ovaltine. Twining
and Ovaltine are the most widespread brands with recognition in around 100 countries. Other
brands and products include Balsamic Vinegar, food ingredients, cereals, snacks, retail shops,
sports nutrition, bread, and baked goods, etc.
Financial Performance: The Company has clocked a 2% growth in the revenue in comparison
to last year. Relevant financial performance is as followed; the past year's figure has been given
in brackets. Revenue stood at Euro 3,512(3420) million, with an adjusted operating profit margin
of 10.8 % (9.8%), and ROCE (Return on Capital Employed) at 27.4% (25.9%).
Other Information: It has spent Pound 12 million as a one-time cost for the closure of the
Twinings tea factory in China.

Sugar:
It is a leading company in the sugar manufacturing and operates 24 plants worldwide and
employs around 34,000 people.

Agriculture:
It provides services, and agri-food to various industries. It has a presence in 65 countries and
employs around 3,000 individuals.

Ingredients:
It is a global supplier of yeast, specialty ingredients, and bakery products across the globe with
52 operating plants along with 7,000 employees.

Retail:
Its retail business is popular for its quality and trendy fashion products. It has 373 operating
stores with 78000 employees.

Important Ratios and Its Relevance

(liquidity, activity, debt, profitability and market ratios.- these are the main ratios that needs to be
covered as per the requirement. Use sub headings for the ratios covered under each of these main
head)
(Arrange the body of the report in a systematic way as per the requirement file)

Use a minimum of 10 ratios to i) compare the financial performance of your chosen company over the
past four financial years and ii) compare your chosen company with a suitable competitor over at least
one financial year.
 Prepare a trend analysis with a commentary indicating the dynamics in the financial performance of
the business over the past four financial years

Comment on the business from an investor’s point of view in terms of movements in ratios

Include overall conclusions and recommendations for enhancing financial performance in future.

Consider the limitations of your analysis and any reservations that you may have about the analysis
that you have provided.)

Liquidity Ratios
It helps in understanding the company’s ability to pay its debts, and the margin of safety enjoyed
by the company. The most relevant ratios for checking the liquidity position of the company are
as follows:

Particular 2019 2018 2017 2016

Current Ratio 1.82 1.63 1.65 1.50
Quick Ratio 1.05 0.95 0.98 0.81
Operating Cash Flow
Ratio 0.49 0.44 0.52 0.44
Net Cash per Debt 936.00 614.00 673.00 -315.00

Current Ratio:
The company’s ability to clear off its short-term debt is measured by the current ratio. A current
ratio of one is considered good. As we can see that the company’s current ratio is more than 1.5
which is quite healthy and it is growing on year on year basis which seems very promising.

Quick Ratio:
It goes one step further than the Current Ratio and indicates the company’s strength for paying
short-term obligation with its most liquid assets. It does take into account only near cash assets
and liabilities. Quick Ratio is derived by deducing inventory and prepaid expenses from the
Current Liabilities. The quick ratio generally follows the pattern on the Current Ratio and here
again, the company has shown a ratio of more than one and is growing regularly. It indicates that
the company is well funded to fulfill its immediate requirements.

Operating Cash Flow Ratio:

This ratio talks about the company’s operating cash flow ability to cover its current liabilities. A
ratio of one or more is considered good and reflects the strength of operating revenues to cover
its liabilities. Operating cash flow should be around 1. But, in this case, the operating cash flow
ranges around .50 which is a little negative as it could mean that the company has a large sale in
a credit or it is unable to get realization from debtors on an efficient basis.

Net Cash per Debt:

This ratio indicates the cash position of the company against the debts raised by it. As mentioned
in the table above, the ratio is growing chronologically, and that reflects a healthy amount of
cash on the books.

Activity Ratios

Activity ratios help to gauge in the abilities of the company to employ its assets and resources to
generate revenue. The few most sought after ratios are Asset Turnover Ratio, Inventory Turnover
Ratio, and Accounts Receivable Turnover Ratio.

Particular 2019 2018 2017 2016

Asset Turnover Ratio 1.15 1.18 1.27 1.18
Inventory Turnover
Ratio 0.19 0.18 0.15 0.16

Asset Turnover Ratio

It is an indicator of a company’s efficiency of the entity to convert assets into the revenue. The
higher ratio shows a better utilization of the resources. The formula stands as Total turnover
divided by average assets over a period. The standard ratio should be more than one and as
evident above it has remained in a similar range over the years. The trend as we can see is
sideways and doesn’t reflect a strong trend. But, still, it is a good sign that the company can
clock revenue to the tune of assets employed in the business.

Inventory Turnover Ratio

The inventory turnover ratio indicates the times at which an organization could convert its
underlying inventory in the sales. The higher ratio is considered better as it shows the smoother
flow of sales and lesser inventory stocking. This is derived by dividing the total turnover by the
inventory of the company. A lower ratio implies efficient utilization of inventory in hand along
with faster turnout cycles. So, given the data above, it is growing a tad over the years. But still, it
is in the manageable range.

Profitability Ratios
These ratios are one of the most looked after parameters from the investor’s point of view. This
ratio checks the company for profit it will be generated from its resources. A few important
profitability ratios are Profit Margin Ratio, Return on Equity, and Return on Capital Employed.

Particular 2019 2018 2017 2016

Profit Margin 5.66% 6.56% 7.30% 6.13%

Return on Equity 9.48% 11.10% 13.44% 11.64%

Return on Capital Employed 19% 20% 21% 18%

Profit Margin Ratio

It indicates the fraction of the revenue converted as a net profit to the company. It is an important
measure to understand the trend in the profitability of the company over the years. Profit margins
are considered better if it increases on a gradual level. As visible from the above table, it seems
like dipping and that is considered as a negative.
Return on Equity Ratio
It indicates the percentage a company earns in the way of return on the capital employed by the
company. A higher return indicates the better-earning capacity of an organization. The return of
Equity should be higher but not because of the push of external borrowings. Here the ROE is
also moving towards the pit which is also a negative factor.

Return on Capital Employed

This measure checks the company’s profit-generating capability on its capital employed i.e.
Share capital, retained earnings, and long term borrowings. It means a company how effectively
earns for its equity and debt holders. Return on capital is in the range of 18%-20% and that is
quite healthy. There is no specific trend in this ratio but still, it is healthy.

Market Ratios

These ratios are generally used by investors for the companies listed in the stock markets. Few
noted parameters are as follows:
Particular 2019 2018 2017 2016

EPS 111.10 127.50 151.60 103.40

PE Ratio 20.51 17.98 22.00 29.56

Earnings per Share

It is the total earnings or profits after tax deducted by other relevant expenses such as preference
dividends and all further divided by the total outstanding shares of the company. EPS of the
company is in the denomination of pence and it has lowered in comparison to the previous years.
This is one of the most important metrics considered by investors.
Price Earnings Ratio
This ratio denotes the times of which a stock is being traded-in concerning its earnings. It is used
to compare multiple companies in similar industries. A higher PE ratio indicates that the
company is trading expensive in the market. But, good companies with strong financials
generally trade higher in the market. A gradual increase in the PE ratio is an indication of lower
earnings per share or higher price of the company.

Conclusion & Recommendations

If we consider the company based on the quantitative analysis, the company has certain
advantages such as strong presence across geographies, recognizable brands, diversified
product portfolio, consistent expansion policies, etc. These factors are considered very
important for a long-term investor because issues of short term would be easily taken
cared of if the holding horizon is high.

 On the qualitative front, the company excels too. It has performed well in various
parameters or ratios as described above. The financial strength of the company is judged
by the liquidity ratios and it has scored well in the current ratio, quick ratio, and net cash
to debt ratio. In the operating cash flow indices, it has performed averagely and that could
be taken up in the coming years. A strong liquidity position gives an assurance towards
liquidation and default situations. Other ratios such as activity and profitability ratio are
also considered good. It has boasted a good asset turnover ratio indicating the optimum
utilization of resources.

 The company stands a good pick under the ratios and financials mentioned above. The
company has consistent in clocking the good return on the investments made in the
company and that is visible through its ROCE and ROE ratios. A regular dividend-paying
stock is a hot favorite of investors, but, it sees some lags in EPS. The PE of the stock is
also on a lower trend and given the strong fundamental footing of the company, it appears
lucrative.
 Competitive Analysis

As Associated British Foods is heavily diversified in various segments, and being a heavy weight
company, it is very difficult to find out an exact peer for the company. We could compare it
with the company, Sainsbury’s plc as it also has a strong presence in the retail departments, and
grocery segment. Again, it also has some unrelated segments such as Property, and Financial
Services.

Limitations in the Analysis (arrange them as per the requirement file)

Financial Analysis is based on past data and there is no guarantee that the company would be
able to perform as in earlier years. UK is facing economic issues as businesses are facing
headwinds. Also, reduction in the Primark’s revenue is also a big concern. It generates
approximately 50% of the revenue and 60% of the sales. But, the management has assured that it
is ready to face challenges, and any such issues won’t affect the company much.

Reference List

a. Foods, A. B., 2019. Annual Reports and Accounts 2019, London: Associated British
Foods.
b. Foods, A. B., 2018. Annual Reports and Accounts 2018, London: Associated British
Foods.
c. Foods, A. B., 2017. Annual Reports and Accounts 2017, London: Associated British
Foods.
 d. Foods, A. B., 2016. Annual Reports and Accounts 2016, London: Associated British
Foods.

Appendices

The calculation of ratios mentioned above has been taken from the information mentioned
below. The financial statements are taken from the Annual Reports for the year 2019, 2018,
2017, and 2016 of Associated British Foods.

2019 2018 2017 2018

Continuing operations
£m £m £m £m
Revenue 15,824 15,574 15,357 13,399
- - - -
Operating costs before exceptional items
14,524 14,290 14,090 12,364
Exceptional items -79 –
Share of profit after tax from joint ventures and 1,221 1,284 1,267 1,035
associates 57 54 63 57
Profits less losses on disposal of non-current
4 6 6 11
assets
Operating profit 1,282 1,344 1,336 1,103

Adjusted operating profit 1,421 1,404 1,363 1,118

Profits less losses on disposal of non-current
4 6 6 11
assets
Amortization of non-operating intangibles -47 -41 -28 -21
Acquired inventory fair value adjustments -15 -23
Transaction costs -2 -2 -5 -5
Exceptional items -79 –
Profits less losses on sale and closure of
-94 -34 293 -14
businesses
Profit before interest 1,188 1,310 1,629 1,089
Finance income 15 15 9 6
Finance expense -42 -50 -59 -56
Other financial income 12 4 -3 3
Profit before taxation 1,173 1,279 1,576 1,042

Adjusted profit before taxation 1,406 1,373 1,310 1,071

Profits less losses on disposal of non-current
4 6 6 11
assets
Amortization of non-operating intangibles -47 -41 -28 -21
Acquired inventory fair value adjustments -15 -23
Transaction costs -2 -2 -5 -5
Exceptional items -79 –
Profits less losses on sale and closure of
-94 -34 293 -14
businesses
Taxation – UK (excluding tax on exceptional
-75 -105 -62 -73
items)
– UK (on exceptional items) 12 –
– Overseas -214 -152 -303 -148
-277 -257 -365 -221
Profit for the period 896 1,022 1,211 821
Attributable to
Equity shareholders 878 1,007 1,198 818
Non-controlling interests 18 15 13 3
Profit for the period 896 1,022 1,211 821
Basic and diluted earnings per ordinary share
111.1 127.5 151.6 103.4
(pence)
Dividends per share paid and proposed for the
46.35 45 41 36.75
period (pence)

Balance Sheet

2019 2018 2017 2016

£m £m £m £m
Non-current assets
Intangible assets 1,681 1,632 1,414 1,348
Property, plant and
5,769 5,747 5,470 5,145
equipment
Investments in joint
225 219 210 221
ventures
Investments in associates 50 47 44 39
Employee benefits assets 228 579 285 6
Deferred tax assets 160 133 143 139
Other receivables 51 50 54 41
Total non-current assets 8,164 8,407 7,620 6,939
Current assets
Assets classified as held
43 – – 312
for sale
Inventories 2,386 2,187
Biological assets 84 84 2,101 2,033
Trade and other
1,436 1,436 90 86
receivables
Derivative assets 99 132 1,342 1,337
Current asset investments 29 30 79 105
Income tax 24 54 28 9
Cash and cash equivalents 1,495 1,362 1,550 555
Total current assets 5,596 5,285 5,190 4,437
Total assets 13,760 13,692 12,810 11,376
Current liabilities
Liabilities classified as
-6 – – -75
held for sale
Loans and overdrafts -227 -419 -265 -245
Trade and other payables -2,556 -2,529 -2,500 -2,366
Derivative liabilities -52 -52 -113 -73
Income tax -163 -160 -170 -147
Provisions -64 -88 -105 -54
Total current liabilities -3,068 -3,248 -3,153 -2,960
Non-current liabilities
Loans -361 -359 -612 -640
Other payables -271 -269 -216 -185
Provisions -54 -52 -27 -34
Deferred tax liabilities -261 -324 -231 -139
Employee benefits
-195 -144 -159 -296
liabilities
Total non-current
-1,142 -1,148 -1,245 -1,294
liabilities
Total liabilities -4,210 -4,396 -4,398 -4,254
Net assets 9,550 9,296 8,412 7,122
Equity
Issued capital 45 45 45 45
Other reserves 175 175 175 175
Translation reserve 409 363 456 433
Hedging reserve -9 13 -31 -22
Retained earnings 8,832 8,615 7,694 6,423
Total equity attributable
9,452 9,211 8,339 7,054
to equity shareholders
 Non-controlling interests 98 85 73 68
Total equity 9,550 9,296 8,412 7,122

Cash Flow Statement:

2019 2018 2017 2016

£m £m £m £m
Cash flow from operating activities
Profit before taxation 1,173 1,279 1,576 1,042
Profits less losses on disposal of non-current assets -4 -6 -6 -11
Profits less losses on sale and closure of businesses 94 34 -293 14
Transaction costs 2 2 3 5
Finance income -15 -15 -9 -6
Finance expense 42 50 59 56
Other financial income -12 -4 3 -3
Share of profit after tax from joint ventures and
-57 -54 -63 -57
associates
Amortization 68 65 57 47
Depreciation 544 509 514 439
Exceptional items 79 –
Acquired inventory fair value adjustments 15 23
Effect of hyperinflationary economies 6 –
Net change in the fair value of current biological
– 5 – -12
assets
Share-based payment expense 22 19 21 7
Pension costs less contributions -10 4 12 7
Increase in inventories -202 -35 -40 -62
Decrease/(increase) in receivables 18 -99 -2 -55
Increase/(decrease) in payables 44 -19 168 107
Purchases less sales of current biological assets -1 -1 -2 -2
Decrease in provisions -28 -30 -1 5
Cash generated from operations 1,778 1,727 1,997 1,521
Income taxes paid -269 -297 -356 -211
Net cash from operating activities 1,509 1,430 1641 1310
Cash flows from investing activities
Dividends received from joint ventures and
52 42 69 25
associates
Purchase of property, plant and equipment -680 -787 -823 -774
Purchase of intangibles -57 -81 -43 -30
Sale of property, plant and equipment 12 23 49 27
Purchase of subsidiaries, joint ventures and
-84 -208 -79 -10
associates
Sale of subsidiaries, joint ventures and associates 6 1 452 –
Interest received 20 10 8 6
-
Net cash from investing activities -731 -367 -756
1,000
Cash flows from financing activities
Dividends paid to non-controlling interests -4 -4 -4 -10
Dividends paid to equity shareholders -358 -327 -299 -279
Interest paid -43 -50 -59 -62
Decrease in short-term loans -263 -111 49 -109
Increase in long-term loans 2 19 -9 12
Decrease/(increase) in current asset investments 1 -30
-1 -1
Sale of shares in subsidiary undertakings to non-
– 1 -3 -252
controlling interests
Movements from changes in own shares held -25 -30 -10 -19
Net cash from financing activities -691 -533 -335 -719
Net increase/(decrease) in cash and cash
87 -103 939 -165
equivalents
Cash and cash equivalents at the beginning of the
1,271 1,386 462 585
period
Effect of movements in foreign exchange – -12 -15 42
1,358 1,271 1,386 462