AB Foods: Primark is straining at the leash

The jewel in the crown at this famous blue-chip is back in action and there's lots to like about these annual results, not least a special dividend.

The benefits of its business diversity and geographic breadth have enabled Associated British Foods (LSE:ABF) to deliver progress, despite further major disruptions which capped the contribution of Primark.

The divisions which did most of the heavy lifting during the pandemic, when Primark stores were shuttered, continue to make a vital contribution, with the important Grocery and Sugar businesses still seeing growth. Investment in the Grocery business is ongoing, with international growth being sought, while the combined efforts of the non-retail operations have resulted in group revenues being maintained, and a near 6% improvement in pre-tax profit for the 53 weeks ended 18 September.

The real driver of the business, though, is Primark, which is straining at the leash for a clear run. During this reporting period, one-third of available trading days were lost due to various lockdown restrictions, resulting in an estimated loss of sales of some £2 billion. When the stores were open, however, the picture was starkly different.

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Like-for-like sales unsurprisingly remain 12% shy of pre-pandemic levels, but the second-half operating margin of 10.6% is a healthy reminder of Primark’s capabilities. The adjusted operating profit, which rose by a remarkable 15% during the period, also reflects the swathe of customers returning to its stores when possible, releasing pent-up demand and with high basket sizes further improving the return.

The group is well aware of the importance of its flagship brand and will not be resting on its laurels, in an effort to maximise future returns. New store openings are ongoing, the brand is developing its presence particularly in the US and Central Europe and, at last, is developing its digital offering in what had previously been one of Primark’s blind spots.

Of course, the group as a whole is not immune from the current supply chain restrictions, which range from port congestion to road freight limitations, which hamper smooth operations, nor from the additional challenges of increased labour and raw material costs. The group is seeking to mitigate these impacts through cost savings and, in the meantime, is helped along by its considerable cash generative ability.

Such financial prudence has resulted in a net cash position of £1.9 billion, which is a notable achievement given the circumstances and which compares with a figure of £1.6 billion the year before. Indeed, such is the confidence of the business that some shackles have now been removed and it has announced a special dividend in addition to the final payment. While the combined dividend payments suggest a yield of just over 2%, it is nonetheless a reflection that a corner has been turned, with the dividend having been completely cut during the height of the pandemic.

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Having weathered the storm, AB Foods seems set fair for a return to form providing that there are no further pandemic-related shocks. The share price has tended to show cautious rather than aggressive progress, having risen by 11% over the last year, as compared to a gain of 18% for the wider FTSE100.

However, with a following wind, Primark may be able to resume its position as the group’s jewel in the crown. Investors also seem keen to join the potential party, and the market consensus of the shares as a "strong buy" echoes true confidence in prospects.