Interactive Investor

Primark owner shows the perks of diversification

20th April 2021 11:52

Richard Hunter from interactive investor

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AB Foods mitigates losses from landmark store closures.

AB Foods (LSE:ABF) has again displayed the benefits of not having all of its eggs in one basket with its half-year results.

The diversified nature of the group has gone some way in mitigating the extreme loss of revenues due to Primark store closures.

Given that these results run until the end of February, and that the latest lockdown was not across the board, comparisons with the previous year are difficult.

Nonetheless the effects of the pandemic are stark. In this period alone, the estimated loss of sales was £1.1 billion.

Even in the brief period when stores were open, customers were generally less willing to travel on the basis of government guidelines.

In any event, many were carrying the burden of an uncertain jobs outlook.

With this in mind, the performance Primark delivered is commendable in the circumstances. In terms of outlook, the company has confirmed record sales in the week since the latest restrictions were eased on 12 April.

With the roll-out of the brand into other geographies continuing, most notably the US where the business has now turned profitable, prospects are encouraging for a part of the business which is currently responsible for 35% of group revenues.

While Primark has been largely hamstrung by the pandemic, other parts of the business have seen the benefit of eating and baking at home, especially the Grocery division which accounts for 29% of sales.

The adjusted operating profit for the residual businesses of Grocery, Sugar, Ingredients and Agriculture increased by 30% and lessened some of the Primark pain.

At the same time, careful financial management has left the group with net cash of £705 million at the end of the period. It has also promised to repay monies from the government support scheme for businesses during the pandemic.

This comes during a period when cash outflows were £860 million, £650 million of which came from Primark store closures and the loss of revenues.

Thus, the reintroduction of a dividend of 6.2p is something of a token gesture at this stage, and will be reviewed as the trading year plays out.

Given the circumstances, the move is perfectly prudent and allows some headway should trading conditions accelerate in the way the group would hope.

Overall, the group has a fight on its hands but has adjusted the factors within its control. Revenues may have dipped by 17% and pre-tax profit by 8%, but the group remains comfortably profitable with the return to some sort of normality an appealing prospect for its flagship brand in particular.

The share price performance reflects the careful way the business has been managed, having risen by 24% over the last year, as compared to a gain of 20% for the wider FTSE 100.

The particularly strong recent run of a price which has increased by 41% over the last six months may have resulted in some profit taking in early trade.

Even so, with the way ahead beginning to clear as lockdowns ease, the market consensus of the shares as a strong ‘buy’ suggests that AB Foods will be well placed to pounce on the recovery.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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