Associated British Foods’ combination of a rapidly growing discount fashion chain with a mature sugar and groceries business makes it one of the odder constituents of the FTSE 100. That peculiarity would also appear to extend to the company’s valuation. With earnings in the 12 months to September 15 up 4 per cent, and forecast to grow just 1 per cent in the current year – which takes them back only to the level of three years ago – a forward earnings multiple of 17 makes ABF look mystifyingly expensive. Neither is there obvious support from the dividend, which offers a sub-market yield of 2.1 per cent – strangely low for a company in which the founding family retains a majority stake.

It was partly that calculation that caused ABF shares to fall by up to 3 per cent yesterday. They have run up 8 per cent over the past fortnight and with the numbers meeting, rather than beating, forecasts and with next year’s estimates unchanged there was nothing to send them higher.

The results themselves were a mixed bag. Sugar was the star, with operating profits up 73 per cent, but that surge was driven by the first full-year contribution from Illovo, the South African producer in which ABF holds 51 per cent. Primark, now accounting for a third of earnings, also fared well, with operating profits 20 per cent higher on sales up 37 per cent. However, poor summer weather and the effects of rapid expansion in space – in which new stores took sales from old – kept like-for-like growth at a modest 1 per cent. Increased discounting and a higher depreciation charge saw margins fall from 14.2 per cent to 12.5 per cent. It was in groceries, where operating profits fell 16 per cent, that ABF’s difficulties were most evident. Increased competition and inability to pass on full effects of higher wheat prices pulled Allied Bakeries into loss, while higher corn oil prices crimped Mazola. A £7 million translation hit from a weak US dollar also weighed.

So why not take profits? The option is perhaps tempting, since growth by Primark, a big influence on the shares’ outperformance, will slow this year after the kick from conversion of the acquired Littlewoods stores. There is also a risk that the chain – now selling one in nine clothing items in the UK – may face a customer backlash if its wares seem ubiquitous.

The rejoinder is that reform of the EU sugar regime, the cause of profit downgrades over the past two years, has now run its course, meaning the current year should mark that division’s lowest ebb. The easing of that burden is evident in forecasts of 11 per cent earnings growth in the next financial year, which explains the shares’ rating. Although ABF, at 890½p, offers little short-term excitement, it has lost none of its status as one of the FTSE 100’s most reliable long-term performers. Hold.

JD Wetherspoon

The strong rise in like-for-like sales at JD Wetherspoon in the month after the English smoking ban on July 1 was a false dawn. The group admitted yesterday that its first-quarter like-for-like sales had fallen by 1 per cent, although total sales were up 1.4 per cent.

On the face of it, that is not too bad a result given the doomsday scenario some had been predicting when a ban was first mooted a few years ago. The company also faced strong comparable trading this time last year, when it reported a 9.2 per cent jump in like-for-like sales.

But the problem for Wetherspoons is that its sales mix is shifting increasingly towards lower margin food sales. While food was up by more than 10 per cent, drink and fruit machine income are both thought to have fallen by about 5 to 6 per cent. The result was a 0.6 per cent fall in the operating margin.

It is difficult, as management admit, to see too much improvement to prospects in the short term and most analysts are not forecasting any margin restoration until 2009.

But it is not all doom and gloom. If its experience in Scotland is anything to go by, like-for-like sales should start to recover from the smoking ban early next year and the ban should ultimately prove to be of long-term benefit to the pub trade.

The shares, off 15½p at 486½p, are trading about 16.6 times full-year earnings. That is not cheap given the short-term uncertainty, but this is a cash-generative business and long-term investors should stay put.

SMG

SMG has long struggled to get air time with investors, despite the attractions of a new management team. The debt load, at about £140 million before yesterday’s announcement of a badly needed £95.7 million rights issue, was one of several reasons to be cautious about the Scottish ITV to Virgin Radio and Pearl & Dean group. Until today, Tempus’s advice has been to avoid.

That cash call makes sense because it allows SMG to sell Virgin in its own time and avoids £20 million of punitive interest charges due next year, on top of the regular £15 million bill. The issue is underwritten, costing £4 million, meaning that debt will drop to £40 million – sensible for a company whose market value had crashed to a valuation of just £80 million. At yesterday’s 30p, investors get the right to buy two new shares for 15p. Once the process is completed in December, those who pay up will end up with three shares worth 20p each. Analysts scrambling to do their sums started cooking up price targets of 26p to 28p, which is a hopeful sign. And with time to sell Virgin Radio, and the Scottish-first television strategy, at least the broad plan appears sound.

The longer-term questions are the state of ITV1 and whether advertising will progress in 2008 at a time when economic growth is expected to slow. Yet these hazards are long known and the big debt negative has gone. This looks like a good entry point. Buy.

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