Associated British Foods gets back on its feet, and DS Smith disappoints on dividends

“Renewed optimism over finding a vaccine for coronavirus more than offset concerns over US unemployment figures later today, causing stocks to push ahead across Asia and Europe,” says Russ Mould, Investment Director at AJ Bell.

“Hong Kong’s Hang Seng index climbed 2.1% while Germany’s DAX index advanced 1%.

“In the UK, the FTSE 100 traded 0.6% higher at 6,194 thanks to strength in financials, telecoms and consumer cyclicals.

“A higher appetite for risk saw investors bid up shares in many companies with considerable uncertainty over their current earnings strength including engineer Rolls-Royce, British Airways owner International Consolidated Airlines and media group WPP.

“Gold was flat at $1,770 per ounce and Brent Crude oil advanced 0.8% to $42.37 per barrel.

“The big story in the commodities space was copper which jumped 0.7% to $6,102 per tonne, trading at its highest level since late January on fears that supplies from major producing region Chile could be interrupted at a time when manufacturing activity globally is starting to pick up.”

Associated British Foods

Associated British Foods’ trading update provides valuable insight into how consumers are behaving now that shops are reopening in many parts of the world. Most interesting is how the once rock-solid big city terrain is now one of the weakest areas for Primark.

“A lack of commuters browsing on their lunchbreak and tourists snapping up bargains has cast a cloud over the retailer’s recovery efforts. Primark is reliant on high levels of footfall in order to drive sales and it doesn’t seem like traffic in city centres is going to shoot up in the immediate future.

“A turning point could come in September if all children in England return to school. This could encourage more people to return to offices, assuming coronavirus cases haven’t flared up, and trigger a rise in footfall for city centre shops.

“Yet it’s worth pointing out that England only accounts for 40% of Primark’s stores and so it is places like Ireland, Spain and Germany which are also relevant to the company’s fortunes.

“Despite clear challenges, management come across as optimistic about the retail arm’s current trading strength which explains why Associated British Foods’ shares have shot up. Also helping matters is the fact that the rest of the conglomerate’s interests are performing better than expected including a strong showing from its grocery arm and guidance for a material increase in profit from its sugar arm.

“The recovery from the pandemic was never going to be easy for businesses yet Associated British Foods’ update would suggest it stands a good chance of bouncing back.”

DS Smith

“For a time the boring old packaging industry was really getting people excited thanks to its role in a rapidly growing e-commerce market but today’s results from DS Smith have arguably demonstrated the limitations of this theme.

“All the online orders made during lockdown need to be packaged up for delivery and sure enough there has been an eye-catching surge in demand for the company’s products which are targeted at this market.

“However, sales of big corrugated boxes to industrial customers are still a significant contributor to DS Smith’s revenue and this business has been squashed by lockdown.

“The weakness in this part of the group is being used to justify the decision not to resume dividend payments.

“Prudence is sensible given the economic uncertainty created by coronavirus and the increased costs associated with adapting its facilities to factor in measures such as social distancing.

“However, it is also hard for management to square the decision to deny income-starved investors any kind of dividend with a resilient performance in the 12 months to 30 April and the demand boost it is enjoying from the surge in web-based shopping. It doesn’t smack of too much confidence in the near-term outlook.

“Longer term the disposal of its plastics division continues to look a positive step given the shift away from plastic packaging, placing the company firmly in line with the sustainability agenda.”

These articles are for information purposes only and are not a personal recommendation or advice.

The daily market update is written by Russ Mould, AJ Bell’s Investment Director and his team. The article highlights the movement in the main index, winners and losers on the day and any macro-economic announcements.