Shore Capital praises AB Foods' actions to turn business around

(Sharecast News) - Shore Capital has reiterated a 'buy' rating for retail and food conglomerate Associated British Foods, praising the company's recent actions to deal with underperforming parts of the business. Ahead of a trading update expected from the firm in September, the broker noted ABF's "demonstrable action to deal with persistent problem children" - namely its bioethanol business Vivergo, the Spanish sugar division Azucarera and UK bakery operations Allied.

The company has already announced that has kickstarted a restructuring of Azucarera, which involves simplifying its manufacturing operations, cutting costs and improving efficiency. Meanwhile, it is currently negotiating with the UK government about Vivergo to find a regulatory solution that it hopes will mitigate certain rules on imported ethanol and the impact of US trade tariffs.

Meanwhile, ABF announced on Friday that it was acquiring the Hovis Brand in an effort to bolster the Allied division, bringing together "two of the leading names in the UK sliced bread market", according to Shore Capital.

"Quite how much profitability will emerge and when, remains to be seen, but we can foresee a welcome boost to ABF's Grocery division here, given that Allied has been making trading losses amounting to, we suspect, £20-30m per annum for some time," the broker said.

Shore Capital said it "applauded these workstreams", adding: "Aligning the stars of ABF is virtuous to the group's investment thesis, to us, and so bringing Allied, Azucarera and Vivergo in from the cold is welcome news.

"In the big scheme of things, [...] we welcome the important improvement in prospects for its UK bakery division, and we reiterate our Buy stance on ABF equity where valuation multiples remain undemanding, to us."