Good reasons to own AB Foods shares

On an upward trend for three months, shares in the Primark firm impress our head of markets. Here’s why.

In kicking off its new year, Associated British Foods (LSE:ABF) has shown that the business continues to thrive, with its retail arm again grabbing the headlines.

If retailers are currently under pressure, Primark has not received the memo. Overall sales increased by 4.5%, largely driven by an increase in selling space, with its international aspirations also showing strong signs of promise. 

The previously anaemic Eurozone contribution showed an increase in sales of 5.1%, driven largely by an improved performance from France and Italy, while the company’s US presence displays tentative early signs of success in a market which the company is understandably keen to crack. 

Meanwhile, the flagship UK business saw an increase in sales of 4%, with particularly strong trading at the end of 2019. Representing around half of group revenues, the retail division is one which not only attracts investor attention for its current trading performance, but also for its clear potential.

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

The grocery division, which had had a strong year and which accounts for around one-fifth of revenues, saw its sales numbers levelling out, but with an improvement in margin, with herbal teas proving popular on both sides of the pond. 

The agriculture business saw increased revenues of 10% and the embattled sugar division, where profits fell nearly 80% last year, enjoyed a 7% improvement in revenues, where this year is expected to be rather more robust. While sugar only represents 10% of sales for the group, the fact that it is turning into positive territory means that the group is enjoying growth almost across the board. 

From an investment perspective, while the dividend yield of 1.8% is not particularly punchy, it is very well covered and the progressive policy which the company employs should lead to further increases.

There are a couple of blots on the landscape, but these tend not to detract from the overall proposition. There was a marginal decline in like-for-like sales within Primark UK, and operating profit margin dipped given the strength of the US dollar making previous purchases more expensive, although there was some mitigation here in the form of cost reductions. 

Elsewhere, competition within the retail sector shows little signs of abating, while the stuttering German economy could prove something of a headwind for AB Foods’ European plans.

At the time of a strong set of full-year numbers in November, the main laggard was the share price. This has now been rectified to some extent, with the shares having risen 14% since. This is a large contributor to pushing the price performance over the last year into positive territory, with a near 15% gain comparing to a rise of 11.4% for the wider FTSE 100 index. 

It has also seen the esteem in which the company is held improve even further with investors, such that a current market consensus of the shares as a “strong buy” is now in place.