ii view: AB Foods confident enough to pay dividend

Early Primark sales have been strong and US stores have turned profitable. Buy, sell or hold?

First-half results to 27 February

• Revenue down 17% to £6.31 billion
• Adjusted pre-tax profit down 50% to £319 million
• Net cash of £705 million 
• Dividend of 6.2p per share

Chief executive George Weston said:

“Primark sales after store reopenings demonstrate the relevance and appeal of our value-for-money offering. We are excited about welcoming customers back into our stores as the lockdowns ease and are delighted with record sales in England and Wales in the week after reopening on 12 April. With our success in a number of new markets, as wide-ranging as Poland and Florida, we are as convinced as we have ever been in the long-term growth prospects for Primark.

“Looking ahead, with stores reopening and Primark once again becoming cash generative, our confidence is reflected in our decisions to repay the job retention scheme monies in respect of this financial year and to declare an interim dividend."

ii round-up:

Associated British Foods (LSE:ABF) operates across the five divisions of grocery, sugar, agriculture, ingredients, and retail. 

Its retail business Primark has over 385 stores across the UK and Ireland, much of Europe and parts of the USA. 

Brands for its food businesses include Twinings, Ovaltine, Mazzetti, Silver Spoon and Billington’s sugars, Jordans and Dorset cereals, Ryvita, Kingsmill, Patak’s, Blue Dragon and Mazola.

For a round-up of these latest results, please click here. 

ii view:

AB Food employs over 135,000 staff in more than 50 countries. The diversity of its business divisions and geographical location helps the company to balance out volatility. Factors outside of management’s control include food commodity prices, currency movements and now a global pandemic. Weak pandemic sales for Primark given closured or disrupted stores are to some degree being counterbalanced by improving trending at its food related businesses. 

For investors, a still Covid clouded outlook cannot be ignored. An estimated price/earnings ratio of above both the three- and 10-year averages also suggests the shares are not basement cheap. And environmental concerns around Primark and the wider fashion industry’s high product turnover are also worth pondering.

That said, profit growth for businesses away from Primark underlines the benefit of its diversification. Further overseas Primark stores remain on the cards while the US business has now turned profitable. The digital arena is also not being overlooked, with more than 22 million Primark followers across social channels. In all, and with management confidence in the outlook emphasised by a return to a dividend payment, grounds for longer term optimism look increasingly justified.   

Positives: 

• Diversified business type and geographical footprint
• Primark expanding store numbers overseas

Negatives:

• A softer H2 performance expected for its food businesses
• Ongoing pandemic uncertainty 

The average rating of stock market analysts:

Strong buy