Proactive Investors - Liberum, the investment bank, has upgraded its price target for Associated British Foods PLC (LON:ABF) from £24 to £28 per share, maintaining a 'buy' recommendation reflecting its confidence in ABF's strong trading performance and its effective capital return strategy.
Since upgrading to buy in June, Liberum said ABF has registered an 11% increase in earnings per share (EPS) since June, with 8% coming from enhanced trading activities and 3% from strategic share buybacks.
It notes that ABF's commitment to shareholder value is further evidenced by its announcement of an additional £500 million share buyback program and a special dividend of 12.7p per share, amounting to approximately £100 million.
The bank also highlights that ABF's capital allocation framework is designed to facilitate cash returns to shareholders when leverage, including lease liabilities, is below one-times.
ABF's current leverage ratios are well within this limit. Liberum points out that the positive trading outlook for ABF is supported by various factors, including margin tailwinds, capital release in Primark, strong growth in the Sugar segment, and lower inflation across the group.
In the Sugar sector, Liberum forecasts a significantly brighter outlook for the fiscal year 2024, driven by high sugar prices, reduced energy costs, and a normal crop season, which are expected to boost profits at British Sugar and Azucarera.
Additionally, Vivergo is projected to reach a break-even point after substantial losses in the past two years, as per Liberum's analysis.
The £500 million buyback program and the special dividend, as Liberum observes, reflect management’s confidence in ABF's future free cash flow (FCF) generation. Liberum estimates that ABF has the capacity to sustain such levels of cash returns regularly.
In the Retail division, Liberum forecasts a return to approximately a 12% earnings before interest and taxes (EBIT) margin from 8% in the fiscal year 2023, aided by price increases, favourable foreign exchange impacts, and reductions in input and freight costs. Liberum also anticipates benefits from operating leverage and automation in future years.
Finally, the bank expects ABF to deliver a 5.9% free cash flow yield on its current market capitalisation in the fiscal year 2024, compared to 2.2% in the fiscal year 2023.
The company's shares are currently trading at a price-to-earnings (PE) multiple of 12.8 times and an enterprise value to earnings before interest, taxes, depreciation, and amortisation (EV/EBITDA) multiple of 7.0 times for the fiscal year 2024.
This valuation, according to Liberum, represents a circa 30% discount to the 10-year average multiples, indicating a significant upside potential for investors and justifying the increased price target and 'buy' stance.
In mid-afternoon trading, the shares were changing hands for £23.69, up 9p on the day.