CSS Partners FTSE350 Market Report

Market Report

19 January 2009

Associated British Foods PLC
Compass Group PLC
Stocks Update

Associated British Foods PLC
ABF.L

Sector	Food producers
Last closing price (19/01/2009) (p)	682.50
52 week High/Low (p)	910/590
Market Cap (£bn)	5.36
Sector weight age by Market Cap (%)	12.14
Average Volume (mn)	1.3
P/E ratio (TTM)	14.95
Industry P/E ration (TTM)	3.37

TTM: Trailing Twelve Month

Daily chart (ABF.L)

Business background and investment rationale

Associated British Foods PLC can be categorised into four segments: Grocery, Primary Food & Agriculture, Ingredients and Retail. The group has sales worldwide as well as manufacturing operations across Europe, North America, Asia, Australia and New Zealand.

Strong retail growth in Primark

In an interim management statement, announced on 15 January 2009, trading at Primark was strong over the Christmas period. Sales were 18% ahead of last year and reflected the increase in retail selling space and very good like-for-like sales growth. As of 3 January 2009 there were 187 stores with 5.6 million sq ft of selling space. At last year end, ABF had opened six new stores: Oviedo, La Coruna and La Gavia (Madrid) – which brought the number of stores in Spain to 12 – while two opened in High Wycombe and Corby in the UK. The sixth new store was in Rotterdam marking ABF’s first move into the Netherlands. Initial trading in the Rotterdam store has been very encouraging.

Weakness in sterling boosting revenue

Group revenue for the first 16 weeks was 21% ahead of the same period last year (15% ahead on a constant currency basis). The weakness of sterling, particularly against the euro and US dollar, has been a major feature of the period with the Grocery and Ingredients sectors proving the main beneficiaries. Revenue was 25% ahead in the Ingredients sector (8% higher on a constant currency basis). ABF’s yeast and bakery ingredients business is trading well with higher volumes and improved pricing.

Acquisition and improvement in cost efficiency

Last year ABF spent £125m on acquisitions, establishing a major presence in the beet sugar industry in North East China, and acquiring certain European assets from the Gilde Bakery. In Australia, the acquisition of KR Castlemaine, a leading meat and small goods manufacturer, included a modern low cost factory at Castlemaine, Victoria and the regional KR brand. Combined with the existing meat business, this will provide an opportunity to drive efficiencies and enable a greater focus on product innovation. The group also announced the merger of Ryvita with Jordans, the UK breakfast cereal and cereal bar business. Sales volumes of breakfast cereals are lower than last year but the merger of Ryvita and Jordans is progressing well on cost savings. The company has also accelerated its overseas expansion of the Jordans brand by tapping in to the group’s international grocery presence.

Technical outlook

On daily chart, ABF is trading on a positive slope making high lows from a 52-week low of 590.0p. Both MACD and 14-day RSI are trading above positive slope indicating long term uptrend. MACD is positive but 12-day EMA has cross below 26-day EMA and indicates a short term correction. RSI is also below 50 and DMI is just below 20, indicating a correction. Stock has support between 660p-670p and resistance at 716p and 752p levels.

Trading strategy

The stock can be bought around 665p with a profit target 741.67p and stop loss of 631.6p (Hedge position: Short position in spread betting with £1.87 bet per point).

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Compass Group PLC
CPG.L

Sector	Travel & Lesuire
Last closing price (19/01/2009) (p)	332.75
52 week High/Low (p)	396.25/235.5
Market Cap (£bn)	5.98
Sector weight age by Market Cap (%)	15.72
Average Volume (mn)	10.15
P/E ratio (TTM)	15.62
Industry P/E ration (TTM)	2.55

TTM: Trailing Twelve Month

Daily chart (CPG.L)

Business background and investment rationale

Compass Group PLC is a contract food service company that provides a range of consumer-facing food service solutions to its clients in 70 countries. It operates in North America, Continental Europe, the United Kingdom and the rest of the world.

Adequately handling food inflation

Through the MAP (Management & Performance) framework, Compass improved its gross margin by 70 basis points, while its organic revenue grew by 5.9% for the year ending November 2008. These improvements came from menu planning; a focus on reducing waste; product and supplier rationalisation; and consumer price increases. Each of these measures helps to address food inflation which falls into three categories: purchasing and supply chain efficiencies; unit cost efficiencies including menu re-engineering; and client and consumer price increases.

Strong revenue growth and expansion in margins

For the full year ending November 2008 Compass North America grew by 7.1%, while margins improved by around 50 basis points. These increases took North Amercia’s overall margin to 6.8%. In Continental Europe the full-year organic revenue growth was 5.4% and margin growth was approximately 60 basis points, with most of the main European countries contributing strongly. In the rest of the world, group organic revenue growth was 10.6% for the full year and there was another strong improvement in the margin of over 120 basis points. Overall, organic revenue growth was 5.9% for 2008, comprising new business of 8.5%, retention of 94% and like-for-like growth of 3.5%. The significant weakening of sterling, in particular against the euro, increased reported revenues by 5.1%, resulting in reported revenue growth of 11.4%. Compass commenced a further £400m share buy-back programme on 1 July 2008 which will support share price.

Technical outlook

On daily chart, Compass is up by 42% from its November 2008 52-week low of 235.0p making an inverted V pattern. Stock has fizzled from that rally but is still above 20, 50 and 200-day EMA, indicating a long-term uptrend. MACD is positive and 14-day RSI is above 50, showing uptrend. However 12-day EMA cross below 26-day EMA in MACD, and 14-day DMI is flat indicating some consolidation. Stock has support at 325.0p and 308.0p and strong resistance near 350.0p.

Trading strategy

The stock can be bought around 322.0p with a profit target of 359.12p and stop loss of 305.85p (Hedge position: Short position in spread betting with £3.88 bet per point).

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Stocks Update

BATS PLC

BATS PLC hit the profit target of 1781.6p recommended on 15 December 2008. Stock is still trading above the profit target and has made a high of 1873.0p. It is way above the October 2008 low of 1350p making a positive slope. MACD is positive and 14-day RSI is above 50 indicating uptrend. It is trading above 20, 50 and 200-day EMA confirming the uptrend. Only 12-day EMA is crossing below 26-day EMA indicating some correction in uptrend. Stock has good support between 1556.0p-1591 and resistance at 1861.0p. If stock falls below 1700.0p and consolidates between 1600p and 1700p, a new entry can be taken.

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Distribution of recommendations for the period 1st October to 19th December 2008:

% Distribution of recommendations No of recommendation

Buy 100% 22

Hold 0 0

Sell 0 0

The first column displays the % distribution of recommendations made by CSS Partners in this Technical Analysis Trading programme and the second column shows the numbers of such recommendation. Neither CSS nor CSS Partners has any investment banking relationships with any of the companies covered in the Technical Analysis Trading Programme, namely the companies in the FTSE 350 index.

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	% Distribution of recommendations	No of recommendation
Buy	100%	22
Hold	0	0
Sell	0	0