Investec Report

26 November 2012

Readers in all geographies please refer to important disclosures and disclaimers starting on page 12. In the United Kingdom this document is a MARKETING COMMUNICATION. It has not been prepared in accordance with the rules in the FSA Conduct of Business Sourcebook designed to promote the independence of research and is also not subject to any prohibition on dealing ahead of the dissemination of research. Full analyst contact details are shown on the back

page.

Martin Deboo +44 (0)20 7597 5044

[email protected]

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AB Foods (ABF.L)

AB Foods (Hol d - TP: 1400p)

United Kingdom | Food Producers

Primark valuation revisited (again)

1450p 1400p

Despite post-prelims sidegrades, the shares continue their climb. With the

quantum of profit in Sugars and the quantum of value in Primark the only two

debates worth having, we focus on the latter in this note. While we are bullish

on the prospects for Primark, we think that the 12-13x EBITDA that the share

price is now apparently discounting is full and fair. Our 12-month SOTP price

target rises to 1400p, but this adds up to a signal to take some profits for us.

Martin Deboo +44 (0)20 7597 5044

[email protected]

Caution confounded, again. ABF continues to confound our caution (and

Hold reco) with the shares ahead of the FTSE 100 over 1, 3 and 6 months,

despite sidegrades post the prelims on Nov 6. Intensely frustrating for us. But

we are where we are and the share price starts tomorrow, as we like to say.

Rising sentiment on Primark the driver? Primark impressed again at the

prelims and we think that it is renewed positive sentiment here that is driving

the shares. Our modelling suggests that the embedded Primark Enterprise

multiple has expanded by 70% since early 2011 and that Primark is now being

implicitly valued at parity with H&M and Inditex.

Looking fully valued to us. The extreme bull case on Primark, as we

understand it, is that business is set for sustained dynamic growth and is worth

the 20+times EBITDA/40+ times earnings multiples that attached to its close

analogue H&M in its late 1990s’ growth heyday.

However the late 1990s was – well – the late 1990s and buying into H&M at

such high multiples was an act of folly, judged with hindsight.

Consider taking profits? More sober counsels argue to us that a prospective

EV:EBITDA of 12-13x is full and fair for Primark, even in the face of such good

prospects and returns. We remain admirers, but cautious Holders, at this level

and would be inclined to take some profits on the back of recent momentum.

Financials and valuation Year end: 30 September Price Performance

Source: Company accounts/Investec Securities estimates Source: FactSet

HOLD

Price: 1450p

Target: 1400p (prev: 1300p)

Forecast Total Return: -1.3%

Market Cap: £11bn

EV: £12bn

Average daily volume: 937k

2011A 2012A 2013E 2014E 2015E

Revenue (£m) 11,065 12,252 12,776 13,499 14,216

EBITDA (£m) 1,238 1,471 1,530 1,633 1,731

EBITA (£m) 921 1,077 1,130 1,206 1,282

PBT (normalised) (£m) 836 974 1,032 1,115 1,204

Net Income (normalised) (£m) 585 688 728 788 852

EPS (normalised & continuing) - FD (p) 74.2 87.2 92.2 99.7 107.6

FCFPS - FD (p) (21.4) 55.0 47.6 59.0 71.4

DPS (p) 24.8 28.5 30.4 32.9 35.5

PE (normalised) (x) 19.5 16.6 15.7 14.5 13.5

EV/sales (x) 1.1 1.0 1.0 0.9 0.9

EV/EBITDA (x) 10.1 8.5 8.2 7.6 7.2

FCF yield (%) (1.5) 3.8 3.3 4.1 4.9

Dividend yield (%) 1.7 2.0 2.1 2.3 2.4

1,000

1,050

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1,400

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Nov-11 Feb-12 May-12 Aug-12

1m 3m 12m

____________________________Price 5.5 9.1 33.6

____________________________vs. FTSE All Share 5.4 7.8 17.0

Page 2 | 26 November 2012 | AB Foods

Primark to the fore again ABF continues to take centre stage as a stock market darling. We continue to sit in

the wings, licking our wounds and ruing our caution, having been Holders of the

stock since mid-September 2011, a period during which it has out-performed the

FTSE 100 by over 20%. Ouch.

Our initial folly was to underestimate the room for upgrades on ABF’s Sugars profits

(40% of FY13E EBITA), which is what we think was driving the shares during Q4

2011 and H1 2012. But buoyant EU sugar prices now look to be factored in, more or

less. And there is relatively limited room for debate on Sugars valuation given that

Ilovo (c. 25% of Sugars EBIT) is a traded instrument and given that Suedzucker

(Rec: Not rated) provides a reasonable public market proxy for the rest.

So once again it is Primark (37% of FY13E EBITA) that seems to be powering the

ABF story. Here, and in contrast to Sugars, near-term profits are reasonably

forecast-able. But there is much more room for debate on valuation, given the

dynamic character of Primark’s growth and relatively broad range of both historic

precedents and contemporary benchmarks. So let’s focus our firepower here.

Primark getting handsomely re-rated? The market’s valuation of Primark remains embedded in its wider valuation of the

ABF Group and its diverse range of businesses.

We can however throw some light on this embedded valuation by running our

customary ‘dynamic SOTP’ model backwards. The essence of this approach is to

allow the value of Primark to be the ‘flex factor’ that reconciles to the prevailing

share price, after valuing the rest of ABF on a consistent basis.

Exhibit 1: Primark embedded prospective EV:EBITDA multiple vs. traded benchmarks

Source: FactSet; Investec Securities analysis & estimates

4x

5x

6x

7x

8x

9x

10x

11x

12x

13x

14x

Primark (implied) H&M Inditex M&S Next

We continue to sit in the wings on ABF,

having been Holders of the stock since

mid-September 2011

We had been underestimating both the

room for upgrades on Sugars and for a re-

rating on Primark

We now think the valuation of Primark

needs looking at again

We try to estimate the market’s

embedded valuation of Primark


Exhibit 1 highlights this analysis. It suggests that, relative to its recent valuation

nadir in March 2011, when the Primark enterprise multiple fell to 7.4x on the back of

cotton price worries, the multiple has now re-expanded by 70%, to 12.7x. As Exhibit

1 shows, this now puts Primark on broad valuation parity with European peers H&M

(Rec: Not Rated) and Inditex (Not Rated) and at a substantial premium to UK peers

M&S (Sell) and Next (Hold).

The analysis in Exhibit 1 is central to our thinking and we are sensitive to the fact

that it looks suspiciously precise, given that Primark is not a traded instrument. So

let us explain it a bit.

We start with ABF’s daily enterprise valuation, defined as its daily market cap plus

our forecast of net debt and the (small) pension deficit on a daily rolling basis. We

then subtract the value of ABF’s Ilovo stake, based on Ilovo’s daily market cap, then

add the capitalised value of the central costs. This gets us to the daily enterprise

value of ABF’s trading Divisions ex. Ilovo. We then value the Divisions ex. Primark

on the basis of daily prospective EV:EBITDA multiple of some relevant benchmarks,

within which the choice of parity with Suedzucker for Sugars ex. Ilovo, and a 40%

discount to Nestle for Grocery, are the key ones. That leaves the value of Primark,

which we re-express as a multiple of prospective rolling EBITDA per our forecasts.

Readers are free to disagree with our valuation benchmarks and there is therefore

legitimate debate over the average ‘height’ of the Primark multiple in Exhibit 1. But

given that our valuation benchmarks are consistently applied over time, and reflect

daily traded multiples in the marketplace, there can be less debate over the trend in

In fact Exhibit 1 may be under-stating the extent of Primark’s multiple expansion if

one takes the view that the market’s embedded valuation of ABF’s Grocery and

Ingredients businesses has been under-performing our chosen benchmarks of

Nestle and ADM respectively, which we would argue they have.

Is the Primark valuation still too cautious? The case of

H&M in the late 1990s Rapid multiple expansion notwithstanding, we are alive to the potential for a bull

case on Primark beyond our estimated 12.7x prospective EBITDA.

This bull case, if we understand it correctly, is that retail concepts undergoing

dynamic periods of growth, particularly international growth, deserve to trade on

high premium multiples. The case rests in particular on the valuation dynamics of

H&M, the Swedish-domiciled value retailer, during its period of rapid expansion in

the late 1990s. This is of course a highly relevant and compelling precedent for

Primark, given that it competes in the same market segment as H&M and is

arguably run on the same sort of ‘managing for long-term value’ principles as its

Scandinavian peer.

Exhibit 2 looks at the long-run trend in the consensus prospective PER and

EV:EBITDA multiples for H&M since the mid-1990s (EV:EBITDA data is only

available from 1999 onwards). As can be seen, H&M went through a period of

explosive multiple expansion from 1995 onwards. At its valuation peak in January

2000, it traded on 67x earnings and 41x EBITDA.

The first and obvious point to make here is that these multiples were achieved in a

rapidly rising market in a period that was, with hindsight, one of extreme value

irrationality. Sales, and growth in sales (as opposed to profit, cash flow or capital

returns), was the only performance metric worthy of consideration. Profit multiples

decoupled from their long-run trends with the result that the FTSE 100 was trading

on 26x earnings, as opposed to 11x now, albeit with a different mix of constituents.

We think that Primark’s embedded

multiple has expanded sharply, to 12-13x

EBITDA

While we think there is room to debate

the absolute valuation on Primark, the

rate of multiple expansion is hard to

argue against

The bull case on valuation from here is

predicated on the valuation of H&M

during its period of sharp expansion in

the late 1990s

At the peak of this period H&M traded on

67x earnings and 41x EBITDA

These multiples were of course achieved

in a rapidly rising market


Exhibit 2: Prospective consensus PER & EV:EBITDA multiples for H&M; 1995-

Source: FactSet; Investec Securities analysis

So we are in a much more sober period and the verdict of hindsight is that it would

have been an act of total folly to invest in H&M at 67x earnings in January 2000.

But that is not to say that there is probative value for Primark in the H&M

experience. While the absolute multiples it achieved were off the scale, it delivered

(and continues to deliver) genuine and durable growth.

So how does what H&M was delivering since the late 1990s compare to what

Primark is delivering now?

The six charts in Exhibit 3 lay out the evidence. The visual logic of each chart is to

look at long-run (since the early 1990s) performance of H&M and then to

benchmark Primark’s current performance against it (the flat red line on each chart).

Our observations are as follows:

Sales growth at H&M in the late 1990s (be it total or LFL1) was substantially

ahead of Primark now (of the order of 2-3x)

Operating profit growth was also well ahead (of the order of 2x), apart from

2000 when higher depreciation on new stores and price discounting hit profits

Returns on capital employed were generally somewhat lower than what

Primark is delivering now

H&M’s rate of store openings was substantially higher than Primark (c. one

and half times as high) and H&M was also internationalising faster at that point

1 Note that H&M didn’t report comparable store sales until 2006 and has never reported selling space. We therefore

rely on the rate of increase in sales per store prior to 2006, but concede that this is a crude proxy for true LFL at

best

0 x

10 x

20 x

30 x

40 x

50 x

60 x

70 x

80 x

PER EV:EBITDA

We compare what H&M was delivering in

the late 1990s with what Primark is

delivering now

Sales growth, profit growth and store

expansion were ahead of Primark now,

but ROCE was behind


Exhibit 3a: H&M total sales growth at constant currencies Red line is recent Primark level

Exhibit 3b: H&M ‘LFL’ sales growth1 Red line is recent Primark level

Source: H&M; Investec Securities analysis & estimates Source: H&M; Investec Securities analysis & estimates 1 Growth in sales per store prior to 2006, comparable store sales since

Exhibit 3c: H&M operating profit growth Red line is recent Primark level

Exhibit 3d: H&M return on capital employed (lease-adjusted)1 Red line is recent Primark level

Source: H&M; Investec Securities analysis & estimates Source: H&M; Investec Securities analysis & estimates 1 Adjusted for operating leases assuming reported rents and an assumed 6.5%

yield. Rents prior to 2000 estimated on the basis of a constant proportion of sales

Exhibit 3e: H&M annual growth in number of stores Red line is recent Primark level

Exhibit 3f: H&M number of countries present Red line is recent Primark level

Source: H&M; Investec Securities analysis & estimates Source: H&M; Investec Securities analysis & estimates

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What this says to us in the round is that, in the late 1990s, H&M was a substantially

stronger ‘growth story’ than Primark is now. The only metric on which Primark now

bests H&M then is on capital returns (and we’re not sure anyone was looking too

hard at those in 1999).

So we would argue that the combination of exceptionally strong growth (in both

sales and profit) plus exceptionally bullish market conditions was what led to H&M’s

sky high valuation in the late 1990s. We would accordingly be cautious of reading

that into Primark now.

A DCF approach says that market has it about right

on Primark Our observation thus far is that Primark has undergone a substantial re-rating and is

now in the Premier League of European international retailers in terms of Enterprise

valuation. While it is still a long way short of H&M in its heyday, the hard evidence is

that it is falling some way short of H&M’s delivery at that point and in any case is

being valued under a very different market mindset.

But there is clearly room for debate beyond the benchmarks. We therefore think it’s

appropriate to conduct a Discounted Cash Flow (DCF) valuation as a sanity check

on our thinking. The summary output from this exercise is shown in Exhibit 4.

Exhibit 4: Summary output from a DCF valuation of Primark

FY13E FY22E

Store numbers 255 435

Average selling space (m. sq. ft) 8.6 16.5

Sales £4.0bn £11.7bn

Operating margin 10.4% 10.9%

EBITDA £567m £1725m

EBITA £415m £1279m

Critical assumptions LFL growth 3%

Capex:sales 7% Investment in NWC:sales 2% Tax rate 26% Discount rate 10% Terminal EV:EBITDA multiple 8.0x

Enterprise valuation PV to FY22 plus terminal value £7049m

FY13E EBITDA £567m Implied EV:EBITDA 12.4x

Source: Investec Securities analysis & estimates

Our DCF values Primark at just over £7bn of enterprise value, being 12.4x FY13E

EBITDA. This is almost exactly in line with the current embedded valuation.

However, as in any DCF, it all comes down to the assumptions, so let us defend

and justify ours.

Our DCF is based on a 10-year explicit forecast period plus a terminal valuation.

Our base year is grounded in our current FY13 forecasts for Primark.

This says to us that H&M was a

substantially stronger ‘growth story’ than

Primark is now

A DCF approach provides a

complementary valuation perspective

The DCF values Primark at 12.4x FY13E

EBITDA, similar to our estimate of the

market’s embedded valuation


Working backwards, we value Primark in the terminal year in line with Next’s current

multiple of 8x EBITDA, which we think is indicative of a mature, but high-performing,

format.

Between now and then, we assume a rate of store openings of 20 per annum,

which leads to a 70% increase in stores and a near doubling of average selling

space. This results in terminal sales of nearly £12bn (3x now), reflecting new space

plus a 3% LFL growth rate through the forecast period.

EBITA more than triples, to close to £1.3bn, reflecting the above plus modest

margin expansion. This in turn reflects some economic recovery plus economies of

scale.

In terms of cashflow, we assume a high rate of capex:sales during the forecast

period (7%), reflecting the rate of store openings. Capex:sales in FY12, a year in

which 19 new stores were opened, was 9%, being 2.5x the depreciation charge.

We assume net investment in net working capital, reflecting recent ABF

commentary on this point (ABF have observed that they pay suppliers relatively

quickly in order to secure better prices and service levels. We have no quibble with

this).

As with all DCF exercises, we think the assumptions are as educative as the output.

In a nutshell, our model reconciles to something like Primark’s current market

valuation. In order to justify that, we have assumed:

A sustained rate of store openings over 10 years at a higher rate than Primark

have recently achieved organically (admittedly one should expect step-change

acquisitions a la Littlewoods looking forward, but ABF will pay a control

premium for those)

LFL sales growth at the current rate, sustained for 10 years

Modest operating margin expansion

Levels of capex and working capital investment commensurate with a high

growth proposition

A terminal valuation commensurate with a mature but high performing retailer.

Note also that our model is implicitly assuming 100% probability of this performance

being delivered. Experience in the retailing industry speaks to the contrary,

however, particularly when international expansion is involved.

The valuation is of course sensitive to the assumptions. By way of illustration, a one

percentage point higher LFL or a one percentage point lower WACC would raise the

EBITDA multiple by one turn. Five more store openings on average per annum

would raise it by one and a half turns.

But what all says to us is that, despite the magnitude of the terminal metrics and the

growth rates, the market is getting it about right at 12-13x EBITDA for Primark.

Setting a 1400p price target and staying Holders. A

moment to take profits? Readers will have got the message by now that our mindset on ABF remains

cautious. That is a caution that has proved to be misplaced over the past 12

months. But we are where we are and have already noted that the shares have

risen by 20% relative to the FTSE during that period. So there is now quite a bit of

belief in the valuation.

Exhibit 5 brings this into focus by looking at ABF’s prospective PER multiple relative

to the FTSE 100. In common with many stocks in our coverage, ABF is more or less

at its relative valuation high (a 35% premium). But unlike the likes of BAT and

Unilever, ABF is not a homogenous business and embraces a number of lower

quality and or hard-to-forecast earnings streams, not least in Sugars.

The DCF rests on what we think are

suitably aggressive and internally-

consistent assumptions

The exercise says to us that the market is

getting it about right on Primark

Our mindset on ABF remains cautious

overall

ABF’s relative PER is also sending a

cautious signal


Exhibit 5 also shows that high relative valuations – even during recent years when

Primark has been a prime factor – have proved vulnerable to reversals. For

example, in January 2011 (when bad weather led to a small profit warning in

Sugars) and October 2011 (when the market rallied and ABF under-performed for a

period).

Exhibit 5: ABF consensus prospective PER relative to the FTSE 100 ex. Financials, resources & consumer staples

Source: FactSet; Investec Securities analysis

So we can’t help maintaining our caution on ABF: as we argue in this note Primark

is, we think, fairly and fully valued. Sugars we haven’t written about today, but our

worries about profits in that business beyond FY13 persist. Grocery we expect to

recover from FY12’s travails but that assumption is in our numbers and, it would

appear, those of the market. Ingredients and Agriculture remain a rounding error.

Our proprietary SOTP model is indicating a 12-month price target of 1400p in round

numbers and we adopt that as our formal price target today. Our target price

increase from the previous 1300p reflects i.) out upgrade of Primark profits (relative

to an overall ‘sidegrade’ for the Group. This increases the proportion of profit on the

highest valuation multiple ii.) our decision to return to our earlier policy of basing

Primark’s valuation on the average of H&M and Inditex, rather than just the former.

H&M’s multiples have been compressing recently on weaker trading results,

whereas Inditex has been rising. As weak trading hasn’t been an issue at Primark

we think it is fairer to track the average rather than H&M alone.

Despite our caution we are not inclined to argue for a formal sell/short

recommendation on ABF. The shares are in fair valuation range per our model,

albeit with some downside. A formal sell on Investec’s criteria would require a target

value of c. 1270p per share, which we don’t think is likely. Finally, we see no

obvious near-term negative catalysts: Primark looks to be trading well (c.35% of

profits). UK sugar profits (c. 15% of the total) are largely locked in for the coming

0

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1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

We increase our price target to 1400p

We are not persuaded to move to a sell

recommendation but do see some

potential to take profits at this level


year. Australia grocery is coming off the ropes and should start to benefit from

recent restructuring investment.

But we think there is an argument for a bit of profit-taking on recent strength and

remain in the cautious Holders camp.

Exhibit 6: Risks to our price target of 1400p

Division/line item What have we assumed? What are the risks?

Sugars, particularly EU An EU sugar price of €760/tonne in the UK in FY13, falling to €700/tonne in FY14. A price of €720/tonne in Spain in FY13, falling to €680/tonne in FY14

We think UK prices have been substantially locked in for FY13 but there remains some risk in Spain in H2 FY13 due to shorter-term contracting

A UK beet crop of c.1.15 m tonnes in FY13 and a 17.5% sugar extraction rate

The crop is in the process of being harvested and remains sensitive to both field yields and extraction rates

Primark 4% LFLs in FY13, 11% sales growth from new space (13 new stores)

LFLs are sensitive to the consumer outlook and competitor actions. Flagship store openings have the potential to exceed or undershoot forecasts

A 20bps increase in operating margins in FY13 Principal cost exposures are to cotton, store staff wages and Asian outsourced labour. We expect these to be containable in FY13

Grocery Reversal of £40m of restructuring charges in FY13, slightly increased underlying margins and c.3% LFL sales growth

Consumer demand for groceries in the UK and worldwide remains febrile

UK wheat prices are a major uncertainty in ABF's bread business

Australia may continue to prove problematic

Other Divisions Only modest growth in profits in Ingredients and Agriculture in FY13, from a low base

While competitive pressures persist, Ingredients profits are at an historic low and the business is under new management

Cashflow, net debt & financing costs Net debt falling by c. £50m in FY13 and a further £180m in FY14 on rising EBITDA and falling capex

We think ABF is soundly financed (net debt is c.0.9x EBITDA) and see financing risk as relatively immaterial

A net interest rate on net debt of 6%

Exchange rates A $ fx rate of 1.60 in both FY13 & FY14 c.50% of Group profits arises from outside the UK, so fx is a key sensitivity

A € rate of 1.25 in both FY13 & FY14 The € is a key sensitivity in Sugars as both sales and costs are denominated in €

Tax We follow company guidance of a 25.5% effective tax rate

The tax rate is sensitive to both the geographic mix of profits and changes I local corporate tax rates

Source: Investec Securities

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Summary Financials (£m) Year end: 30 September

Source: Company accounts, Investec Securities estimates

Income Statement 2011 2012 2013E 2014E 2015E

Revenue 11,065 12,252 12,776 13,499 14,216

EBITDA 1,238 1,471 1,530 1,633 1,731

Depreciation and amortisation -317 -394 -400 -427 -449

Operating profit 921 1,077 1,130 1,206 1,282

Other income - - - - -

Net interest -85 -103 -98 -91 -78

Share-based-payments - - - - -

PBT (normalised) 836 974 1,032 1,115 1,204

Impairment of acquired intangibles -83 -100 -113 -110 -106

Non-recurring items/exceptionals 5 -113 0 0 0

PBT (reported) 758 761 919 1,005 1,098

Taxation -180 -178 -220 -241 -264

Minorities & preference dividends -36 -28 -29 -32 -35

Discontinued/assets held for sale - - - - -

Net income (normalised) 585 688 728 788 852

Attributable profit 542 555 669 732 799

EPS (reported) - FD (p) 68.8 70.3 84.7 92.5 100.9

EPS (normalised & continuing) - FD (p) 74.2 87.2 92.2 99.7 107.6

DPS (p) 24.8 28.5 30.4 32.9 35.5

Average number of group shares - FD (m) 788 789 790 791 792

Average number of group shares (m) 788 788 789 790 791

Total number of shares in issue (m) 791 791 791 791 791

Cash Flow 2011 2012 2013E 2014E 2015E

Operating profit 921 1,077 1,130 1,206 1,282

Depreciation & amortisation 317 394 400 427 449

Other cash and non-cash movements -147 -83 -58 -58 -58

Change in working capital -199 43 -50 -50 -50

Operating cash flow 892 1,431 1,422 1,525 1,623

Interest -88 -108 -95 -88 -75

Tax paid -156 -191 -242 -258 -279

Dividends from associates and JVs 9 10 6 6 6

Cash flow from operations 657 1,142 1,090 1,185 1,275

Maintenance capex -826 -708 -714 -718 -709

Free cash flow -169 434 376 467 566

Expansionary capex - - - - -

Exceptionals and discontinued operations 0 0 0 0 0

Other financials -51 56 0 0 0

Acquisitions -21 -43 -65 0 0

Disposals - - - - -

Net share issues -16 0 0 0 0

Dividends paid -212 -223 -262 -284 -308

Change in net cash -469 224 49 183 258

Net cash/(debt) -1,285 -1,061 -1,012 -830 -572

FCFPS - FD (p) (21.4) 55.0 47.6 59.0 71.4

Balance Sheet 2011 2012 2013E 2014E 2015E

Property plant and equipment 4,465 4,541 4,851 5,107 5,332

Intangible assets 1,893 1,769 1,726 1,650 1,580

Investments and other non current assets 405 412 436 460 484

Cash and equivalents - - - - -

Other current assets 2,887 2,887 0 0 0

Total assets 9,650 9,609 7,013 7,217 7,395

Total debt -1,285 -1,061 -1,012 -830 -572

Preference shares 0 0 0 0 0

Other long term liabilities -383 -344 -322 -306 -290

Provisions & other current liabilities -1,763 999 1,049 1,099 1,149

Pension deficit and other adjustments -44 -95 -61 -26 11

Total liabilities -3,475 -501 -347 -62 298

Net assets 6,175 9,108 6,666 7,155 7,693

Shareholder's equity 5,748 5,834 6,272 6,753 7,282

Minority interests 427 387 394 402 411

Total equity 6,175 6,221 6,666 7,155 7,693

Net working capital 1,260 4,022 1,185 1,235 1,285

NAV per share (p) 726.7 737.5 792.9 853.7 920.6


Selection.Ta bles(1). Range.Fiel ds.Update

Calendarised Valuation Year end: 30 September


Ratios and Metrics Year end: 30 September


2011 2012 2013E 2014E

Calendar PE (x) 19.2 16.4 15.4 14.3

Calendar Price/NAVPS (x) 2.0 1.9 1.8 1.7

Calendar EV/sales (x) 1.1 1.0 1.0 0.9

Calendar EV/EBITDA (x) 9.9 8.4 8.1 7.6

FCF yield (%) (0.1) 3.7 3.5 4.3

Dividend yield (%) 1.7 2.0 2.1 2.3

Ratios and metrics 2011 2012 2013E 2014E 2015E

Revenue growth (y-on-y) (%) 8.8 10.7 4.3 5.7 5.3

EBITDA growth (y-on-y) (%) 0.4 18.8 4.0 6.8 6.0

Net income (normalised) growth (yoy) 2.7 17.7 5.8 8.3 8.1

EPS (normalised) growth (y-on-y) (%) 2.7 17.6 5.7 8.1 8.0

FCFPS growth (y-on-y) (%) (13.5) 24.0 21.0

NAVPS growth (y-on-y) (%) 8.6 1.5 7.5 7.7 7.8

DPS growth (y-on-y) (%) 4.0 15.2 6.7 8.1 8.0

Interest cover (x) 10.8 10.5 11.5 13.2 16.4

Net debt/EBITDA (x) 1.0 0.7 0.7 0.5 0.3

Net debt/equity (%) 20.8 17.1 15.2 11.6 7.4

Net gearing (%) 17.2 14.6 13.2 10.4 6.9

Dividend cover (x) 3.0 3.1 3.0 3.0 3.0

EBITDA margin (%) 11.2 12.0 12.0 12.1 12.2

Operating profit margin (%) 8.3 8.8 8.8 8.9 9.0

ROE (%) 10.2 11.8 11.6 11.7 11.7

ROCE (%) - - - - -

NWC/revenue (%) 11.4 32.8 9.3 9.1 9.0

Tax rate (normalised) (%) 24.5 24.8 25.0 25.0 25.0

Tax rate (reported) (%) 23.7 23.4 24.0 24.0 24.0


Disclosures

Analyst certification Research recommendations framework

Each research analyst responsible for the content of this

research report, in whole or in part, and who is named

herein, attests that the views expressed in this research

report accurately reflect his or her personal views about

the subject securities or issuers. Furthermore, no part of

his or her compensation was, is, or will be, directly or

indirectly, related to the specific recommendations or

views expressed by that research analyst in this research

report.

Third party research disclosures

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total return defined as the expected percentage change in price plus the projected dividend yield). Our rating bands

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Stock ratings for research produced by Investec Bank plc

Source: Investec Securities estimates

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Company disclosures

Key: Investec has received compensation from the company for investment banking services within the past 12 months,

Investec expects to receive or intends to seek compensation from the company for investment banking services in the next 6

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Expected total return

12m performance Count % of total Count % of total

Buy greater than 10% 195 60% 88 45%

Hold -10% to 10% 103 32% 16 16%

Sell less than -10% 27 8% 1 4%

All stocks Corporate stocks

AB Foods Marks & Spencer Next

http://www.investec.co.uk/legal/uk/conflicts-of-interest.html


Recommendation history (for the last 3 years to previous day’s close)

AB Foods (ABF.L) – Rating Plotter as at 23 Nov 2012

Source: Investec Securities / FactSet

Next (NXT.L) – Rating Plotter as at 23 Nov 2012


Marks & Spencer (MKS.L) – Rating Plotter as at 23 Nov 2012


0

100

200

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400

500

600

700

800

900

1,000

1,100

1,200

1,300

1,400

Buy Hold Sell Not Rated

Price Target

0

200

400

600

800

1,000

1,200

1,400

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1,800

2,000

2,200

2,400

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3,000

3,200

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Price Target

020406080

100120140160180200220240260280300320340360380400420440


Price Target


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