ii view: a glass half-full or half-empty at AB foods?

Primark sales are down but profit margin is strong. Are investors missing the bigger picture?

Full-year trading update to 18 September 2021

• Expects adjusted operating profit to be higher than last year
• Expects net cash to be up 19% year-over-year to £1.9 billion
• Primark Q4 like-for-like sales expected to be down 17%

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

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

For a round-up of this latest trading update, please click here. 

ii view:

AB Foods says its purpose is to provide safe, nutritious, affordable food and clothing that is great value for money. It employs over 130,000 staff in more than 50 countries. Its Speedibake business has grown to become one of the leading producers of bakery products in the UK with a range of over 600 products. Its sugar business has the capacity to produce over four million tonnes of sugar each year.

Clothing chain Primark generates its biggest chunk of sales at just over 40%, followed by grocery at around 25% and sugar, ingredients, and agriculture all at around 10% or 11%. 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 retail business, remains. Environmental concerns around Primark and the wider fashion industry’s high product turnover also warrant consideration. And an estimated price/earnings ratio of above both the three- and 10-year averages also suggests the shares are not obviously cheap.

But management’s focus on costs has seen full-year analyst profit forecasts being raised following this latest update. An environmental or sustainability strategy for Primark has now been detailed, including all clothes being made using recycled or more sustainably sourced materials. New overseas Primark stores continue to be opened and its online presence expanded. The share price reflects a lot of negativity. However, with Primark slowly, if somewhat unevenly, emerging from the pandemic, and analysts estimating a fair value share price of around £26, grounds for long-term optimism remain.

Positives: 

• Diversified business type and geographical footprint
• Launching a new Primark website

Negatives:

• Expects lower adjusted operating FY profit for the grocery business
• Covid restrictions hampering search for new Primark sites 

The average rating of stock market analysts:

Strong buy