AB Foods is top FTSE 100 stock after share surge

Down 38% since 2017, our head of markets looks for signs that this share recovery is sustainable.

AB Foods (LSE:ABF) is playing to its strengths, with its two largest units doing most of the heavy lifting over the past year.

The Grocery division, which accounts for 22% of revenues, saw full-year adjusted operating profit jump by 13% and margins rise to nearly 11% as the US and Australian businesses delivered major improvements. Indeed, the international units generally profited from new product launches, while the bakery business was scaled back due to perceived overcapacity.

However, it is the Retail unit, which contains discount clothing chain Primark, where the most striking opportunities lie. The unit accounts for half of overall group revenues and adjusted operating profit rose by 9.5%, underpinned by sales which were 4.2% higher. 

The company has a strong pipeline of stores to come, particularly in the likes of France and Spain, and further store openings in the US reflect a market which AB Foods is particularly keen to crack. The early signs, such as in the Brooklyn store, are extremely promising and, if the company can gain traction as new stores roll out, the potential is enormous. 

In the meantime, operating margin is healthy at nearly 12% and the group is also reaping rewards from the current zeitgeist of social media, where its followers now number 20 million from a previous 13 million.

Source: TradingView Past performance is not a guide to future performance

Elsewhere, a new joint venture in China adds to the mix and the company's significant cash balance enables further opportunities as and when they arise. Indeed, the company invested nearly £840 million in the business over the last year, and in such a way as to underline the benefits of diversification, both by business and by region.

As previously guided, the Sugar division had a poor year, with adjusted operating profit plunging by 79%, although, at 10% of revenues, the impact is manageable. Much as the profit decline was due to the sugar price, so the group expects fortunes to improve as this price recovers.

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In terms of the business overall, a drop in pre-tax profit was mitigated when adjusted, resulting in an operating profit which increased by just 1%. Meanwhile, although the dividend was increased, the current yield of 2% tends to move the stock towards being a growth rather than income story.

The outlook from the company is positive and should be bolstered by its expansion plans. While AB Foods is not dismissive of Brexit implications, it makes the point that for the most part its supply chains are discrete, and the relative lack of cross-border trading provide some insulation. 

Amid the positive potential, the missing part of the jigsaw of late has been a share price which has fallen 12% over the last six months and has drifted 7% over the last year, as compared to a 3.7% gain for the wider FTSE 100 index. 

Today's share price reaction to these results undoes some of that damage and the general market view of the shares as a 'buy' is also a reflection of the esteem in which the company is held.