Thursday, June 1, 2023

Investors’ Chronicle: Zoo Digital, Oxford Instruments, Associated British Foods

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BUY: Zoo Digital (ZOO)

The company believes its new dubbing business will help it take market share, writes Arthur Sants.

Zoo Digital is employed by studios to make movies and TV shows accessible to global audiences. This is known as localisation. Zoo adds subtitles and dubs movies and shows, as well as making sure they run smoothly online. The company works with most of the major streaming platforms.

Management sees dubbing as the strongest growth area. The company has a system that allows voice actors from all around the world to work from home, rather than having to record in studios. Dubbing is currently only a small part of the business but makes up around 70 per cent of the global localisation market.

Zoo has benefited from higher levels of spending on new content as the streaming wars raged. Its adjusted cash profit (Ebitda) more than doubled to $7.3mn (£6.3mn) and it swung to a profit before tax for the first time. Content production is now slowing down, but Zoo is yet to be affected, with a “strong order book” in place.

The board currently thinks Zoo’s addressable market is $1.5bn; it currently has 4 per cent of this. By 2030, it expects the market to double to $3bn and believes its market share could rise to 14 per cent, driven mainly by the growth of its dubbing business, which is yet to take off. This would give Zoo revenue of $420mn. In that time, it expects operating margins to expand to 20 per cent as it benefits from its scalable platform.

If all of this comes to fruition, Zoo could be a valuable business. However, streaming has just gone through a boom period, boosted by low interest rates and pandemic lockdowns, but this is now slowing down. Even so, a FactSet consensus forward price/earnings ratio of 22 looks affordable given rapid top-line growth.

BUY: Oxford Instruments (OXIG)

First-half sales have been disrupted by lockdowns in China and supply chain stresses, writes Michael Fahy.

For many businesses, Covid-related disruptions are already a thing of the past.

For Oxford Instruments, though, an inability to access customer sites in China held back growth, as did a requirement to secure more export licences to ship products to the country — some of which were refused.

Oxford Instruments makes products that image, analyse and manipulate materials at molecular levels, both for academic and commercial customers. The latter now make up more than half of sales.

Growth in its semiconductors arm was flat, meaning it dropped from being the biggest revenue contributor to the second biggest, with 29 per cent of the total. It was overtaken by the Advanced Materials business, which grew by 15 per cent and now makes up 31 per cent of the total. Overall sales increased by 18 per cent.

The silver lining to the delays is that the company’s order book swelled to almost £316mn — a 36 per cent increase — giving it “good visibility for an expected improvement in trading in the second half”, chief executive Ian Barkshire said.

Operating profit was up by a fifth to £26.3mn and net cash (excluding leases) increased by £11mn during the six-month period to £97mn, with its strong balance sheet facilitating acquisition opportunities, according to Barkshire.

Oxford Instruments’ shares have been on a rollercoaster ride this year — partly the result of an aborted 3,100p bid by Spectris, which got cold feet after Russia’s invasion of Ukraine.

They now trade at 1,976p, or 22 times broker Shore Capital’s forward earnings forecast of 89.8p a share. This doesn’t seem like too hefty a price for a well-regarded specialist operating in profitable niches.

HOLD: Associated British Foods (ABF)

While total sales outstripped pre-pandemic levels, European trading and margin performance is concerning, writes Christopher Akers.

Associated British Foods shareholders with an eye on the return of capital will be very pleased with the Primark owner’s tasty combination of a £500mn share buyback programme and an 8 per cent uplift in the full-year dividend.

This was confirmed on the back of a mixed set of results, with the most significant surprises (given the detail already shared in a September update) the size of the buyback and an impairment charge put through against German assets due to weak Primark trading there.

The £206mn charge, recorded due to struggling sales and “unacceptable” store profitability levels, characterised a delicate year for the company’s European retail operations, with sales down by 16 per cent against the pre-pandemic period. UK trading was better, and improved as the year progressed, but overall retail sales were still down by 10 per cent on a three-year basis.

The outlook is challenging — management expects Primark’s adjusted operating profit margin for 2023 to come in below 8 per cent due to commodity price and consumer spending headwinds. When it will get back up to 10 per cent is uncertain, especially as prices have been frozen. Progress with a click and collect system, and a pipeline of 27 new stores for this financial year, should at least help with the top line going forwards.

When it came to the company’s other divisions, which drove the revenue uplift against 2019, sugar, agriculture, and ingredients posted higher profits, with the grocery division the outlier. But the adjusted operating margin was down across all four areas, with ingredients and sugar margins diluted by 130-basis points and 120-basis points respectively. Management flagged a timing lag in cost recovery due to negotiations on price increases with retailers, and it is no surprise that chief executive George Weston said that “substantial and volatile cost inflation will be the most significant challenge in the new financial year”.

Barclays analysts raised their 2023 earnings per share forecast by 4 per cent to 126p but warned about “footfall trends into 2023 as well as the prospects for the wider clothing apparel market and discretionary spending”. That’s a rational position to take and is reflected in management’s expectation that adjusted operating profits and earnings per share will be lower in 2023 than in these results.

But with expectations of material food sales growth due to price increases, share price outperformance against the FTSE 350 retail sector over recent months, and the good news of the buyback programme, which should be completed this financial year, ABF still looks well situated. The shares trade at an undemanding 11 times Barclays’ 2023 earnings forecast.



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