Associated British Foods beats expectations, and Mondi reports amid rumours of blockbuster packaging deal

“The FTSE 100 enjoyed a strong start on Thursday buoyed by comments from the chair of the US Federal Reserve which sought to allay market fears about the prospect of rising inflation leading to interest rate hikes,” says AJ Bell Investment Director Russ Mould.

“Crude oil prices remained strong amid optimism over a covid recovery with other commodities surging ahead; this supported some of the big names in the resources sector, further bolstering the FTSE’s advance.

“And if you thought the GameStop saga was over, well think again. The shares surged 100% overnight in a sign that January’s Reddit-inspired trading frenzy might be about to return.”

Associated British Foods

“The company’s update is very good under the circumstances with food, ingredients and agriculture sales and profits ahead of expectations and the Primark retail division showing remarkable resilience for the periods when its shops were open.

“While Associated British Foods has stood out like a sore thumb in the retail sector for refusing to sell its clothes online due to concerns about the economics, one cannot fault the business for also sticking to its guns and maintaining a conglomerate status when so many people said there were merits to spinning off Primark.

“During the pandemic it has enjoyed diverse sources of revenue which have helped prop up the business when one part has been struck by significant operating challenges.

“The important point to note in its latest update and in previous ones is that consumers are quick to return to Primark shops as soon as lockdown measures are lifted.

“More than four fifths of its retail selling space should be trading by late April, meaning the company must only get through two more difficult months before it can start to bring Primark back to full health.

“Even though lots of people have been buying clothes online during the pandemic, it is fair to suggest that there is still pent-up demand for going into shops to touch and feel items. In Primark’s case, it could easily see a big rush of customers looking to restock their wardrobes with cheap items, particularly if they’ve put on a few pounds snacking during lockdown and they need to go up a size.”

Mondi/DS Smith

“Maybe the best things don’t come in small packages after all. Paper and packaging firm Mondi is reportedly mulling a deal for sector peer and fellow FTSE 100 constituent DS Smith.

“Any transaction would be one of the largest in the UK this year and though neither party has yet issued any comment on a potential tie-up, DS Smith shares are still charging ahead.

“The growth of online shopping has been a slow-burning driver for the packaging industry for several years, after all nearly everything you order over the web arrives at your door in a box.

“This trend has accelerated massively in the last 12 months as we have been stuck at home thanks to coronavirus restrictions.

“However, while this has led to reports of cardboard shortages and driven strong demand, particularly in the fourth quarter and over Christmas, Mondi’s results today show this was not enough to outweigh the loss of business in other areas due to the pandemic.

“In a hint at the wider inflationary pressures spooking the market, Mondi is also seeing upward pressure on raw material costs.

“This has been exacerbated by the plethora of used cardboard stuck in people’s homes; with pick up and recycling services unable to keep up, this has driven up the price of recycled containerboard which the likes of Mondi and DS Smith use to manufacture boxes.

“Scale could be a big advantage in capitalising on the e-commerce related opportunity, which could be the reason for Mondi’s apparent interest in delivering some blockbuster M&A.”

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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.