Deutsche Bank Markets Research Rating Company Date 29 July 2016 Buy A B Foods Special Report Europe United Kingdom Reuters Bloomberg Exchange Ticker Price at 28 Jul 2016 (GBP) 2,686.00 Consumer Staples ABF.L ABF LN LSE ABF Price Target (GBP) 3,200.00 Food Manufacturing ADR Ticker ISIN 52-week range (GBP) 3,599.00 - 2,350.00 ASBFY US0455194029 An introductory guide Warwick Okines Research Analyst (+44) 20 754-58546 [email protected] An introduction to ABF: from field to fork and from teabags to t-shirts This report is intended for readers looking for an introduction to AB Foods and Jaina Mistry its five divisions. We would direct those familiar with the company to our Research Associate report "Not just about Primark", also published today, for a discussion of our (+44) 20 754-71337 view of the stock. [email protected] A diverse conglomerate: around the world in 80 years AB Foods (ABF) is listed in the Food Producers & Processors sector and is the Charlie Muir-Sands, CFA 26th largest company in the FTSE100 by market capitalisation. It is majority Research Analyst owned by the Weston family and CEO George Weston is a grandson of the (+44) 20 754-75749 founder. It operates five divisions: Grocery, Sugar, Agriculture, Ingredients and [email protected] Retail. Its largest brand by both sales and profits is Primark, a value fashion retailer operating predominantly in Europe. In addition ABF owns consumer food brands such as Twinings, Ovaltine, Ryvita and Kingsmill; it is a manufacturer of sugar on three continents; and develops and manufactures a wide range of ingredients and agricultural feeds. This report describes the history, operations and drivers of the group. 10 things you may not know about AB Foods Whilst this Introductory Guide is aimed at those new to ABF, we see value for more seasoned readers. Ten things we would highlight as being of interest are: ABF’s ultimate controlling party is a charitable trust; In 2015 51% of profits were generated outside the UK, the highest proportion since the global financial crisis; Capital expenditure excluding spend on Primark has declined since 2011; When Penneys entered the UK in 1973, it used the Primark brand because Penneys was registered to JC Penney; Primark sells more units than Inditex each year but has one third of its revenues; Primark’s average selling price is less than half of H&M’s and it makes less than half of the profit from selling 100 items than H&M; Grocery has the second highest divisional ROCE, after Retail, reaching its record adj. operating profit margin of 9.0% in 2015; Sugar fell from 46% to 4% of group adj. EBIT between 2012 and 2015. As well as sugar the division grows tomatoes and produces electricity; The Agriculture division is small but has a 10 year adj. operating profit CAGR of over 10%, second only to Retail; The Ingredients business develops enzymes that are not only used in food production but also in textiles, detergents and converting waste to biofuels. ________________________________________________________________________________________________________________ Deutsche Bank AG/London Distributed on: 07/29/2016 18:04:03GMT Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 057/04/2016. 29 July 2016 Consumer Staples A B Foods Model updated:29 July 2016 Fiscal year end 14-Sep 2013 2014 2015 2016E 2017E 2018E Running the numbers Financial Summary Europe DB EPS (GBP) 98.09 104.08 102.05 102.78 119.92 131.02 Reported EPS (GBP) 74.05 96.46 67.34 100.55 118.49 129.77 United Kingdom DPS (GBP) 32.35 34.00 35.00 36.55 42.03 46.24 BVPS (GBP) 779.1 814.8 802.0 868.4 939.8 1,018.3 Food Manufacturing Weighted average shares (m) 790 790 790 790 790 790 A B Foods Average market cap (GBPm) 13,479 20,947 23,590 21,219 21,219 21,219 Enterprise value (GBPm) 14,429 21,497 23,787 21,394 21,016 20,491 Reuters: ABF.L Bloomberg: ABF LN Valuation Metrics P/E (DB) (x) 17.4 25.5 29.3 26.1 22.4 20.5 Buy P/E (Reported) (x) 23.0 27.5 44.3 26.7 22.7 20.7 Price (28 Jul 16) GBP 2,686.00 P/BV (x) 2.32 3.22 3.80 3.09 2.86 2.64 Target Price GBP 3,200.00 FCF Yield (%) 4.2 3.2 2.5 2.4 3.3 4.2 Dividend Yield (%) 1.9 1.3 1.2 1.4 1.6 1.7 52 Week range GBP 2,350.00 - 3,599.00 EV/Sales (x) 1.1 1.7 1.9 1.6 1.4 1.3 Market Cap (m) GBPm 21,219 EV/EBITDA (x) 8.9 13.6 16.6 13.6 11.9 10.9 EV/EBIT (x) 13.3 19.9 25.1 19.6 16.9 15.3 USDm 27,839 Income Statement (GBPm) Company Profile Sales revenue 13,315 12,943 12,800 12,997 14,522 15,184 Associated British Foods PLC is listed in the Food Gross profit 3,220 3,150 3,029 3,076 3,437 3,593 Producers & Processors sector. It operates 5 divisions: EBITDA 1,623 1,576 1,429 1,568 1,766 1,886 Grocery, Sugar, Agriculture, Ingredients and Retail. Its Depreciation 405 402 401 421 470 492 largest brand is Primark, a value fashion retailer operating Amortisation 130 94 81 55 54 52 mainly in Europe. ABF also owns consumer food brands EBIT 1,088 1,080 947 1,092 1,242 1,342 such as Twinings, Ovaltine, Ryvita and Kingsmill; it is a Net interest income(expense) -87 -58 -53 -40 -21 -6 manufacturer of sugar on three continents; and develops Associates/affiliates 0 0 0 0 0 0 and manufactures a wide range of ingredients and Exceptionals/extraordinaries -128 -2 -172 0 0 0 agricultural feeds. Other pre-tax income/(expense) -5 0 -5 -5 0 0 Profit before tax 868 1,020 717 1,047 1,221 1,336 Price Performance Income tax expense 240 237 193 246 285 312 Minorities 43 21 -8 6 -1 -1 4000 Other post-tax income/(expense) 0 0 0 0 0 0 3600 Net profit 585 762 532 794 936 1,025 3200 2800 DB adjustments (including dilution) 190 60 274 18 11 10 2400 DB Net profit 775 822 806 812 947 1,035 2000 1600 Cash Flow (GBPm) 1200 Jul 13 Jan 14 Jul 14 Jan 15 Jul 15 Jan 16 Cash flow from operations 1,169 1,369 1,143 1,183 1,306 1,497 Net Capex -601 -691 -542 -675 -595 -607 A B Foods FTSE 100 INDEX (Rebased) Free cash flow 568 678 601 508 711 890 Equity raised/(bought back) -22 34 -34 0 0 0 Margin Trends Dividends paid -232 -256 -271 -289 -332 -365 Net inc/(dec) in borrowings 0 0 0 0 0 0 14 Other investing/financing cash flows -57 -98 -44 50 0 0 12 Net cash flow 257 358 252 269 379 525 11 Change in working capital -97 100 -66 -53 -110 -27 9 Balance Sheet (GBPm) 8 Cash and other liquid assets 362 519 702 726 1,104 1,629 6 Tangible fixed assets 4,552 4,665 4,488 4,996 5,126 5,246 13 14 15 16E 17E 18E Goodwill/intangible assets 1,581 1,467 1,367 1,338 1,310 1,284 EBITDA Margin EBIT Margin Associates/investments 218 212 212 212 212 212 Other assets 3,661 3,609 3,503 3,531 3,775 3,871 Growth & Profitability Total assets 10,374 10,472 10,272 10,803 11,528 12,243 Interest bearing debt 1,166 965 896 896 896 896 15 14 Other liabilities 2,689 2,754 2,825 2,829 2,990 3,086 12 Total liabilities 3,855 3,719 3,721 3,725 3,886 3,982 10 10 Shareholders' equity 6,155 6,437 6,336 6,861 7,425 8,045 8 5 6 Minorities 364 316 215 217 217 216 0 4 Total shareholders' equity 6,519 6,753 6,551 7,077 7,641 8,261 2 Net debt 804 446 194 170 -208 -733 -5 0 13 14 15 16E 17E 18E Key Company Metrics Sales growth (%) 8.7 -2.8 -1.1 1.5 11.7 4.6 Sales growth (LHS) ROE (RHS) DB EPS growth (%) 12.5 6.1 -2.0 0.7 16.7 9.3 Solvency EBITDA Margin (%) 12.2 12.2 11.2 12.1 12.2 12.4 EBIT Margin (%) 8.2 8.3 7.4 8.4 8.5 8.8 15 250 Payout ratio (%) 43.7 35.2 52.0 36.4 35.5 35.6 10 200 ROE (%) 9.7 12.1 8.3 12.0 13.1 13.3 Capex/sales (%) 4.6 5.5 4.8 5.2 4.1 4.0 5 150 Capex/depreciation (x) 1.2 1.4 1.3 1.4 1.1 1.1 0 100 Net debt/equity (%) 12.3 6.6 3.0 2.4 -2.7 -8.9 -5 50 Net interest cover (x) 12.5 18.6 17.9 27.5 59.0 221.9 -10 0 Source: Company data, Deutsche Bank estimates 13 14 15 16E 17E 18E Net debt/equity (LHS) Net interest cover (RHS) Warwick Okines +44 20 754-58546 [email protected] Page 2 Deutsche Bank AG/London 29 July 2016 Consumer Staples A B Foods Table Of Contents A brief history .....................................................................