Investment Column: Ignore short-term ABF wobble, it's a buy


Our view: Keep buying

Share price: 1072p (-16p)

Associated British Foods (ABF) failed to win any favour with the market after yesterday's trading update: the FTSE 100 touched its highest level since late April, but the owner of the discount clothes retailer Primark was among the weakest of the blue chips as investors moved out on evidence of slowing sales growth at the chain.

The 204-store-strong retail business accounts for a third of the group's profits and has been a standout that has accounted for much of its resilience through the recent economic slump. As others wobbled (and some were wound up), Primark drew strength as demand remained strong for its cut-price offerings.

Yesterday, ABF said Primark's like-for-like sales are expected to grow by 6 per cent over the full-year period. This suggests that growth is slowing. In fact, it slipped from 7 per cent in the third quarter to 4 per cent in the fourth, at least according to analysts at Panmure Gordon. It is worth noting, however, that the figures are being compared against a very strong final quarter last year.

As for the flutter in the share price, well, ABF is up strongly since the beginning of the year. Coupled with the clouds on the high street – consumer sentiment, for instance, remains weak and VAT is set to go up in January – the Primark figures probably sparked a round of profit-taking from those who have followed the ABF train higher. However, we think there's more to come from ABF.

The fact is that another slowdown on the high street will only spur demand for Primark's offerings. We therefore expect growth to tick back up in due course, driving higher earnings for the group as consumers turn away from more expensive retailers. ABF's other businesses are also doing well, while its shares remain affordable. At 14.6 times prospective earnings for 2011, we're willing to bet that this horse will continue to gallop ahead of its peers. Keep buying.

PZ Cussons

Our view: Hold

Share price: 345p (+15.9p)

We've all got to wash, at least in theory. And that is good news for PZ Cussons, the maker of Imperial Leather soap and Carex hand wash.

Publishing its first-quarter update yesterday, the company said that trading was in line with expectations, helped by new product launches and strong demand in emerging markets. According to the oft-churned-out thesis, investments in defensive groups such as PZ Cussons should work well in times of woe as investors move to safer bets, and struggle more in the good times when the latter get the nerve to back something a little racier.

But as the economy has continued with a fragile recovery in recent months, so PZ Cussons' shares have rocketed, up by more than 50 per cent in the past year. The problem for investors that have not yet bought is that they may by now have missed the boat. With the shares trading on a 2010/11 multiple of 20.4 times forecast earnings, the stock is already fully valued by the market. Growth in the share price has steadied in recent months, suggesting that the stock is in for a period of water-treading.

There is plenty of growth in the group's emerging-markets businesses, particularly Nigeria, and we have no doubt that the stock is a solid one to hold. But with an uninspiring dividend yield of 2 per cent and a stable share price, we wouldn't be buying any more. So just hold for now.

Galleon Holdings

Our view: Speculative buy

Share price: 8.25p (+0.75p)

Despite its name, Galleon Holdings has no involvement in shipping. It is a media entertainment company that makes reality shows, drawing a return from selling them to emerging markets. One of its more prominent offerings is Super Soccer Star, made in conjunction with Chelsea FC, which has been taken to Brazil, Columbia, Malaysia and China. Yesterday's news saw the launch of Super Golf Star, a reality television show aiming to find the next... well, you get the picture.

Galleon is not limited to sports, as another format it launched last year is Super Fashion Stars, where lucky winners land a spot at this year's Fashion Fringe event. Broker Cenkos believes revenues will be lower in 2010 than last year, when sales were £27.1m, but should bounce back to £37.2m in 2011.

Galleon also has solid blue-chip institutional shareholders, a sign of quality for an AIM company. It had a tough start to the year, making a half-year loss of £700,000, but the broker expects profits at the full year, when the effects of an overhaul in China kick in. Trading on eight-times-forecast full-year earnings, it's hardly expensive and while not for the risk-averse, it's a buy for those of a mind to speculate.

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