Investment Column: Wait for weakness before buying ABF
Man Group; Centaur Media
Friday 10 July 2009
Our view: Hold
Share price: 763p (-2p)
Primark gets a fair amount of press, quite often bad, especially when it is about protests over how much the people who make its clothes are paid.
Associated British Foods (ABF), the group that owns Primark, and various grocery and sugar businesses, issued its interim management statement yesterday, hoping that the numbers would do the talking. Group sales rose by 15 per cent in its third quarter.
John Bason, finance director, says that Primark has changed the face of retailing on the high street. And who can disagree, after Primark posted a 21 per cent jump in sales in the quarter to 20 June, especially with many competitors slipping into administration.
There was similarly good news in the sugar business – ABF markets Silver Spoon sugar – while grocery sales were also up. Mr Bason argues that changes to EU rules on sugar will help sales next year.
However, none of this was enough to convince the analysts at Evolution, who yesterday advised clients to sell their ABF stock: "We have a 'sell' recommendation and 700p target price. Trading on 12.3 times... we think the rating is more than up with events."
We would be tempted to be a little more enthusiastic about the shares. The group is clearly performing well, and those looking at the retail sector would be crazy not to have at least part of the portfolio dedicated to ABF.
We do follow the Evolution line that there are probably more profitable bets out there, but would be more inclined to agree with the Investec watchers: "We see this as a solid and reassuring statement from ABF. We are happy to remain a holder of the shares on this news, but continue to feel cautious on valuation."
ABF is a strong performer, and for that reason alone we would be happy holding the shares. We do think they are a bit pricey, however, and would wait for a bit of softening before buying.
Our view: Tentative buy
Share price: 240.75p (+1.5p)
Man Group, the hedge fund, is feeling happier than it has for some time after yesterday's interim management statement.
The group has been battered during the financial crisis, with the share price falling by 60 per cent in the last 12 months. The group told its AGM yesterday that things are changing: private investors provided net inflows of $1.9bn, while institutional outflows fell to £3.3bn, a much better performance than in recent months, and enough to give the group enough confidence to say total inflows will be positive in the second half of the year.
While clients are getting happier about giving their cash to Man to manage, so investors should be happier putting their money into the stock.
The fact is that the shares are cheap. The watchers at Killik & Co argue: "The stock still remains attractively valued, and we continue to be supportive over the longer-term outlook, with the group benefiting from the failure of rival smaller hedge funds and investors gradual increasing risk appetite. We would continue to buy the shares on weakness."
We still have concerns that the return to confidence in the financial services sector is a bit Emperor's New Clothes-esque, but we do think that Man is a good bet in its sector, and that the stock is undervalued.
Buy, but do so carefully and be prepared to get out on signs of weakness. Tentative buy.
Our view: Sell
Share price: 33.5p (-4.5p)
Business-to-business publishing, the job of producing those newspapers and magazines that you will not find next to your Independent on the newsstand, has largely had a woeful last year.
Centaur Media, publisher of titles like The Lawyer, is no different. The group issued a trading statement yesterday saying that its markets would remain challenging for the foreseeable future. Mike Lally, finance director, concedes that it will be a while before things improve, but that yesterday's update "echoed" previous statements.
Maybe, but some investors were clearly not expecting some of the bad news yesterday, with the share price falling by 11.8 per cent. Mr Lally says that we are trundling "along the bottom", and with the group's operational gearing, when the good times come along, so the company will prosper.
We agree, but see little point in buying the stock now. The good times that many companies promise will signal a return to the days of milk and honey may still be some time away, and while we do not have concerns about Centaur's long-term viability, we would join those that sold yesterday. Centaur needs the advertising market to improve before we would be buyers. Sell.
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