ii view: AB Foods banking on revival of Primark

Is this food producer and retailer a shining example of a diversified stock market business?

Full-year update to the end of September

• Adjusted earnings per share to be significantly below 2019 due to Primark lockdown closures
• Primark adjusted operating profit of around £350 million or more, down from £913 million
• Full-year net cash expected to be at £1.3 billion

ii round-up:

Associated British Foods (LSE:ABF) is a diversified international food, ingredients and retail group. Operating across the five divisions of grocery, sugar, agriculture, ingredients and retail, it employs over 135,000 staff in more than 50 countries.

The company's retail business Primark has over 380 stores across the UK, Europe and the US.  Its food brand names 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 this latest trading update, please click here. 

ii view:

Diversity of its business divisions and geographical locations help AB Foods balance out volatility in food commodity prices such as sugar or currency movements – factors outside of management’s control. But a complete shutdown of its Primark stores during the pandemic would not have been in management’s thinking. 

That said, diversity continues to prove its worth. While full-year Primark profits will still drop significantly due to Covid-19, a strong increase in the aggregate profit for its sugar, grocery, agriculture, and ingredients businesses will help to compensate. Like food ingredient prices, retail can also be a volatile business. Together, the businesses arguably make a better investor proposition than if separate. 

More specifically, the scrapping of the half-year dividend payment back in April was disappointing, if sensible, given the pandemic. Environmental concerns around Primark and the wider fashion industry’s high product turnover are also worth considering. But AB Foods remains a well-managed business with room to expand Primark. For now, and despite a still uncertain outlook, its shares remain worthy of consideration for the long term. 

Positives: 

• Diversified business type and geographical footprint
• Planning to open 14 new Primark stores overseas

Negatives:

• Primark profit hit by lockdown store closures
• No half-year dividend payment

The average rating of stock market analysts:

Buy