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Associated British Foods - all Primark shops shut

Nicholas Hyett, Equity Analyst | 23 March 2020 | A A A
Associated British Foods - all Primark shops shut

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Associated British Foods Ord 5,15/22p

Sell: 1,800.50 | Buy: 1,804.00 | Change -55.00 (-2.93%)
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Associated British Foods (ABF) has announced all 376 of its stores across 12 countries are now closed. This represents the loss of around £650m in net sales every month.

The group is reviewing all expenditure. It's significantly reduced discretionary spending, cut fixed costs through discussions with landlords and is looking to take advantage of government support where available. As a result it expects to be able to recover 50% of total operating costs.

The group has stopped placing orders with suppliers.

ABF had access to £1.9bn in liquidity at the half year, with £800m in net cash and a £1.1bn credit facility.

The sugar, grocery, ingredients and agriculture businesses have still not seen a material impact from the coronavirus outbreak.

The shares fell 5.9% in early trading.

View the latest ABF share price and how to deal

Our view

The shuttering of Primark's shops and lack of online business means ABF's largest division is currently delivering zero revenue. While the group's various food focused divisions seem to have escaped knock on effects from the virus so far, the challenge now is to offset or trim the fixed costs in the retail division.

Underlying operating profits outside retail amounted to £508m last year, around 35% of the total. That gives the group some breathing room.

We also take comfort from the fact that early action on costs seem to be bearing fruit - with 50% of costs already looking set to be recovered. We suspect that, as one of the few retailers taking on new space, the group enjoys something of a whip hand with struggling retail landlords. Significant available cash also means the group can weather a few fallow months - although the impact on the balance sheet will be long lasting.

However, significant challenges will start to emerge the longer the lockdown drags on. Staff, rents and suppliers all need to be paid, even if they can be reduced to some extent, and that will eat into cash reserves until the group needs to borrowing to keep things ticking over.

Retail operating costs were in the region of £575m a month last year. That includes the purchase of new stock (which will obviously be much lower going forwards) but even after cost saving efforts, the group's £800m of net cash could quickly disappear.

Nonetheless, while it's far too early to say how things will pan out, we think ABF is one of the better placed names in the retail sector. That's partly because it has significant non-retail businesses but also reflects a relatively healthy balance sheet and strong negotiating position with landlords.

Put all that together and it probably explains why the company has yet to cancel its dividend, with analysts forecasting a 2.9% prospective yield. It could yet come under pressure if the lockdown continues though, after all no dividend is guaranteed.

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Half Year Trading Update & initial coronavirus update - 16/03/20

ABF expects adjusted operating profit in the first half to be ahead of previous expectations, thanks to improved margins.

However, disruption from the coronavirus outbreak means the group has closed a number of European Primark stores. ABF said it's too early to "provide earnings guidance for the remainder of the current financial year."

Higher margins at Primark and in the Grocery business mean adjusted earnings per share will be higher than last year, on both a lease-adjusted and reported basis.

In Italy, France, Spain and Austria Primark stores have been forced to close. These shops account for 30% of Primark's sales, and Primark had expected to generate £190m from these sites over the next four weeks. They'll remain closed until they are permitted to open by the respective governments.

For the rest of the Primark estate, including the UK - which accounts for 41% of sales, like-for-like sales have been declining over the last fortnight. This trend has worsened over the past few days. ABF doesn't expect it will be able to offset the impact of these lost sales.

In the Sugar business, the situation has improved following the announcement of potential Chinese supply issues in February. Supply shortages from that country are now expected to be minimal.

The group said it "had not seen a material impact" on the sugar, grocery, ingredients and agriculture businesses.

ABF said it has a net cash position of £800m and significant undrawn bank facilities. Half year results are expected on 21 April.

Find out more about Associated British Foods shares including how to invest

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