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ABF - positive trends but uncertainty means no dividend

Sophie Lund-Yates, Equity Analyst | 3 November 2020 | A A A
ABF - positive trends but uncertainty means no dividend

No recommendation

No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Associated British Foods Ord 5,15/22p

Sell: 1,971.50 | Buy: 1,973.50 | Change 1.00 (0.05%)
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Full year revenue fell 11% to £13.9bn, reflecting the closure of Primark stores earlier in the year. Underlying operating profit of £1.0bn was 30% behind last year. The group also recognised a non-cash charge of £156m, the majority of which relates to the value of some Primark stores and inventory being written down. Including this, operating profit was £810m.

The group expects Primark full year sales and profits to be higher next year, but this will be weighted to the second half. Associated British Foods is mindful this could change in light of the newly announced restrictions.

The ongoing uncertainty means ABF has decided not to declare a final dividend.

The shares fell 1.8% following the announcement.

View the latest ABF share price and how to deal

Our view

Primark, Associated British Food's (ABF) largest division, did exceptionally well as lockdowns lifted. Performance was better than either we or management had expected.

We suspect Primark's lower price point will have served it well as cautious consumers ventured back onto the high street. A lack of discounting also helps margins. We've been particularly impressed at the group's ability to shift such huge quantities of what was considered excess summer stock when shops were first forced to close.

There's an element of pent up demand which is boosting sales, but crucially basket sizes have been higher than this time last year. That suggests a longer-term positive trend to us.

The other point in Primark's favour is that, as one of the few retailers taking on new space, the group will enjoy the whip hand when it comes to negotiating with struggling retail landlords. This is an important tool at the group's disposal, especially with the outlook still uncertain. This kind of advantageous position can help support profits in tough times.

Unfortunately a second lockdown means a lot of this good work at Primark is now on hold. That will hurt in the short term, but that's where the other strings to Primark's bow come in. The group's various food businesses account for a big chunk of group operating profit, and they should continue to operate as before.

The Grocery division in particular benefitted from increased sales over the lockdown as consumers eat more at home, and that's enhanced both sales and margins. Meanwhile a cyclical upturn in EU sugar prices is expected to improve profits in the sizeable Sugar business.

While the strong operating performance is certainly notable and welcome, it's the balance sheet forecasts that really caught our eye. ABF finished the year with £1.6bn in net cash. That's good going at any time, let alone when the waters have been choppy. That implies some very impressive cash conservation over the last couple of months, especially as the group continues to open new stores, but also sets the group up well to weather further economic disruption.

The combination of a price competitive retail product, diversified business interests and strong balance sheet means we think ABF is one of the better placed names in the retail sector. While the immediate future remains uncertain, future growth opportunities (particularly in the US) and weaker competitors mean the group could emerge from this crisis in a better position than it started. That's not something we would say of many retailers although of course there are no guarantees.

ABF key facts

  • Price/Earnings ratio: 14.1
  • 10 year average Price/Earnings ratio: 20.0
  • Prospective dividend yield (next 12 months): 2.6%

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Full year results

Primark store closures in the third quarter meant revenue fell 24% to £5.9bn for the year. Underlying operating profits fell 62% to £362m, as cost savings didn't offset the lower revenues while shops were closed.

All shops reopened in July, and management says trading has been very positive since then. This meant the £284m charge recognised at the half year against unsold inventory wasn't needed. Instead a markdown provision of £22m for the year has been created, and the value of excess inventory going into next year is £150m.

The store opening programme has been delayed by the crisis, but the group was able to open 12 new shops in the year. 0.7m sq ft of new selling space is expected to be opened next year (equivalent to 14 stores).

Looking ahead, ABF expects the second lockdown in England, combined with current closures in the Republic of Ireland, France, Belgium, Wales, Catalonia in Spain and Slovenia, will result in £375m of lost sales.

An increase in demand for retail products offset declines in foodservice in the Grocery business. Revenues rose 2% to £3.5bn, and benefited from increased sales of Silver Spoon, Jordans, Dorset Cereals, Ryvita and AB World Foods items. Improved margins combined with the higher sales meant underlying operating profits rose 15% to £437m.

Sugar was buoyed by higher EU sugar prices, which combined with cost efficiencies offset the weaker performance at Illovo. In all, revenues rose 5% to £1.6bn and operating profit was £100m, compared to £30m last year.

The Agriculture and Ingredients businesses saw revenues rise 3% and 1% respectively, and generated profits of £43m and £147m.

The group used less working capital, reflecting strong product demand in the food businesses and later autumn/winter ordering for Primark. This fed into a net cash position of £1.6bn, up from £936m last year. At the end of the year ABF had access to £1.5bn of borrowing facilities, and available cash of £1.6bn

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

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.