Interactive Investor

Renewed optimism at AB Foods after Primark's Q3 boom

1st July 2021 09:04

Richard Hunter from interactive investor

Latest results have attracted buying interest and AB Foods shares are on the up.

Primark, owned by Associated British Foods (LSE:ABF), is back with a bang after restrictions were eased and has taken over the heavy lifting which other parts of the group had assumed during the various lockdowns.

With third-quarter revenues rising by 207% versus the previous year and now accounting for around 40% of the group total, this is an important return to form. In addition, there is still more to go for, with tourism travel and opening hours restrictions still in place. At the same time, the now profitable US business has added another store in Chicago, and the total Primark estate should reach 400 shops in the autumn.

Within the Primark numbers, there was an element of pent-up demand following the reopening of stores, but even here the level of demand was significantly stronger than had been seen in previous lockdown easings. Increased basket sizes and lower levels of markdown also added to the stellar performance, while Primark’s overall contribution was a key factor in increasing net cash for the group to £1.45 billion, up from £705 million just three months prior.

In other parts of the business, Grocery (which accounts for 27% of revenues) is expected to fall slightly against strong comparatives and lower margins resulting from higher costs. Sugar, at 12% of revenues, is expected to have a more positive outturn given the strength of global sugar prices and strong performances from Illovo and from China.

All is not plain sailing, however, and although the overall revenues increased by 47% in the quarter, they remain down by 2% in the year to date. Indeed, even Primark’s turbocharged quarterly revival leaves the year to date revenue number down by 11%.

At the same time, the company is ramping up its digital presence through the likes of social media, but the online offering remains minimal in comparison to peers with no obvious signs of a major shift in this part of the strategy in the offing. The guidance is that Primark profit will be broadly in line with last year, which nonetheless represents a shift in fortunes for the group as a whole.

Despite the obvious difficulties which the pandemic presented, the diversified nature of the group has shown its true worth over an extraordinary period. The shares have added 16% over the last year, as compared to a hike of 14% for the wider FTSE100, even though the more recent movement has been fairly tepid.

However, optimism surrounding the stock continues unabated, driven by recovery and growth prospects in both the UK and overseas retail businesses and with the insurance of a diverse overall offering. As such, the market consensus still points to a 'strong buy'.

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