Broker tips: ABF, Tobacco stocks
By Alexander Bueso
Date: Tuesday 24 Mar 2020
(Sharecast News) - ShoreCap reiterated its 'buy' recommendation for shares of Associated British Foods, hailing its "exceptionally good liquidity".
The food ingredients manufacturer was also 'well positioned' when it came to the solvency of the group and its ability to "ride a notable storm", the City broker said.
Its analysts also noted that all of the company's operations, bar retail, were continuing to trade.
As of February, ABF had ?800m of cash on hand and ShoreCap believed it had fully drawn down its ?1.1bn revolving credit facility on top of that.
"We cannot predict the financial impact of COVID-19 upon ABF's FY2020 earnings, but they will clearly be below recent prevailing market and Company expectations.
"As such, we are withdrawing our FY2020 [current pre tax profit] and EPS estimates.
"Unusually, however, we are retaining our BUY recommendation on ABF stock because beyond being what we deem to be a demonstrable relative outperformer in these terrible, worrying, times, we also believe it is a still profitable, solvent and liquid organisation that has the basis to prosper in what could be a somewhat different world down the line."
Analysts at Citi said 2020 dividend payouts from the world's largest tobacco companies were safe.
They attributed their confidence to tobacco firms' resilience, adding that if their sales did slow, they still had recourse to reducing spending on so-called 'next generation products' or credit lines.
"Philip Morris, Altria, British American Tobacco, Imperial Brands and Swedish Match" will definitely be able to pay their interest bills, their maturing debt, their MSA fees plus their dividends in 2020, the analysts said in a research note sent to clients.
The MSA fees were due to at the end of April and the companies, most importantly Philip Morris, would need to tap the market for commercial paper or its credit lines to make payments.
Under a 1998 Master Settle Agreement with 46 US State Attorney Generals, the big four US tobacco firms had agreed to annual payments in perpetuity to the states to make up their healthcare costs.
And in practice, they did need access to capital markets to make "large and lumpy tax payments to governments," Citi said.
"By summer they will have generated the cash to pay this debt off. PM and Swedish Match are the strongest companies financially, but we are not worried about any of them."
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