ii view: AB Foods has ambitious expansion plans for Primark

A diverse business, expansion plans and an estimated forward dividend yield of around 2.5%. Buy, sell or hold?

Full-year results to 18 September 2021

• Group revenue flat at £13.9 billion
• Statutory pre-tax profit up 6% to £725 million
• Final dividend of 20.5p per share from no final dividend in 2020
• Special dividend of 13.8p per share
• Net cash before lease liabilities up 19% to £1.9 billion
• Net debt including lease liabilities of £1.38 billion

Chief executive George Weston said:

“Primark delivered a good performance in the face of continued disruption to trading caused by the pandemic. It also unveiled its wide-reaching sustainability strategy with the aim of making more sustainable fashion affordable for all. Although the possibility of further trading restrictions cannot be ruled out, we expect Primark to deliver a much-improved margin and profit next year. We are now intent on expanding our new store pipeline and investing in technology and digital capabilities to continue improving the performance of the business.

“Given the strength of our balance sheet and our confidence in the future we are setting out today a new capital cash allocation policy that provides the Group with the capital it needs both for investment and financial stability while allowing for enhanced returns to shareholders when appropriate.”

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 398 stores across the UK and Ireland, much of Europe and parts of the USA. 

Brands for its food businesses include Burgen and Kingsmill breads, Jordans and Dorset cereals, Ryvita, Silver Spoon, Speedibake, Twinings teas and Ovaltine. 

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

ii view:

AB notes that its purpose is to provide safe, nutritious, affordable food and clothing that is great value for money. It employs over 125,000 staff in more than 50 countries. Grocery generates its biggest chunk of operating profit at just over 40%, followed by retail at just under a third, sugar and ingredients at around 15% each and agriculture at 4%. 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. 

For investors, pandemic uncertainty, particularly in relation to its European Primark business, continues. Environmental concerns around Primark and the wider fashion industry’s high product turnover also warrant consideration. 

But a new capital allocation policy allowing surplus cash to be distributed to shareholders, depending on debt levels, has seen a special dividend declared. And an estimated future dividend yield in the region of 2.5% is not derisory in the current ultra-low interest rate environment. A new target to reach 530 Primark stores come 2026 sees retail emphasises ambitious expansion plans, while environmental and online strategies for Primark have both recently been sharpened. In all, with its diversity continuing to show its worth and analysts estimating a fair value share price of £24.56, reason for long-term optimism persists.

Positives: 

• Diversified business type and geographical footprint
• Targeting 530 Primark stores from under 400

Negatives:

• European Covid cases back rising 
• Cost pressures in energy, logistics and commodities

The average rating of stock market analysts:

Strong buy