AB Foods shares are oversold, is now the time to buy?

Primark-owner AB Foods took a pasting after the group said Primark sales would fall in the second half of the year due to poor weather and low footfall.

After losing roughly 18% of their value since August highs, AB Foods shares are currently firmly in oversold territory with an RSI of 21. The sharp decline should pique the interest of investors seeking an entry point with the long-term investment case intact.

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The Weather

AB Foods has blamed slow sales in the second half on the weather. We all know how disappointing the British summer was this year, and companies heavily reliant on good weather to drive consumer purchases have been hit hard. AB Foods isn’t the only company to attribute bad sales to poor weather.

Primark is particularly reliant on in-store sales. Although it has been strengthening its online presence, Primark is still driving people into its stores by focusing on click-and-collect and the online shopping experience provides little help during a washout summer.

However, AB Foods used the same excuse earlier this year for slow sales growth in the first half. The winter was too warm and the summer too cold, according to AB Foods.

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Investors have evidently grown tired of the same excuse and dumped the stock. For those with longer time horizons, this may provide an opportunity.

Primark’s same-store sales growth is fairly steady, and the company relies on new store openings for growth—this has proved a fruitful pursuit. The company is expanding across southern Europe, and new store openings are expected to increase US sales by 25% in the second quarter.

‘Build it, and they will come’ seems to be working for Primark. The brand’s low-cost clothing is a hit wherever it opens a new store.

The company plans further expansion in the US, which promises further growth in the years to come. Primark are also eyeing the Gulf Cooperation Council markets after signing an agreement with a local partner.

Investors should note that despite uneven sales growth, Primark’s margins are strong, and they expect operating margins to be higher in H2 2024 than H2 2023.

Food

AB Foods (as the name suggests) isn’t just the owner of Primark, and food sales account for roughly half group sales.

Sales from the food side of the business are expected to be steady in the second half and pose no major concern for investors, despite agriculture and sugar’s risk of adverse weather conditions. AB Foods uses the word ‘weather’ 15 times in its interim report to give you an idea of how much its business is dependent on Mother Nature.

All three food-related divisions saw operating profits grow in the first half of the year. However, due to sugar pricing in Europe, the company expects a disappointing second half for the unit, which may have contributed to the recent selloff.

Valuation

From a valuation perspective, AB Foods offer good value at 2,170p. They trade at 11x forward earnings and 15x historical earnings. The historical earnings multiple is reasonable, and the forward multiple, should estimates be meet, suggests very good value.

Don’t expect fireworks from AB Foods, but Primark’s overseas expansion plans and stable long-term earnings from the food business should support a move back to all-time highs above 3,000p.

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