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Associated British Foods - profits rise despite disruption

Nicholas Hyett, Equity Analyst | 9 November 2021 | A A A
Associated British Foods - profits rise despite disruption

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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: 1,591.50 | Buy: 1,592.50 | Change 11.00 (0.70%)
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Associated British Foods (ABF) reported full year revenues of £13.9bn, up 1% once you exclude the effect of currency movements. That reflects good progress across the various Food divisions, which saw revenue rise 5% overall compared to a 5% fall at Primark.

Underlying operating profits rose 2% at constant exchange rates to £1.0bn. That reflects very strong growth in Sugar, thanks to a rising global sugar price together with cost savings and improvements in efficiency.

The board announced a final dividend of 20.5p per share and a special dividend of 13.8p per share. That takes the full year total to 40.5p per share,

The shares rose 6.3% in early trading.

View the latest ABF share price and how to deal

Our view

Despite its name, Associated British Food's biggest money maker in normal times is Primark.

Unfortunately, retailers have struggled more than most over the pandemic - with forced closures and reduced high street footfall both hitting hard. That's not helped by Primark's lack of an online offering. However, Primark has done far better than you might have expected.

Having your shops forcibly closed for a third of the year and losing only 5% of sales is no mean feat, especially without an online business to fall back on. The group is confident of regaining at least £2bn of lost sales next year - and given the queues we've seen when Primark has been open that doesn't seem unreasonable.

We've been particularly impressed at the group's stock control. It's been able to shift huge quantities of excess stock from when shops were first forced to close, and even managed to set new sales records at its stores when lockdowns eased. That's helped it avoid excess discounting - a serious gold-star in today's climate, and together with excellent cost control had helped the group deliver robust margin performance.

Associated British Food's idiosyncratic structure also helped it navigate the current uncertainty. Sales across the group's various food businesses have been strong - and a particularly good year for global sugar prices mean profits have boomed in the group's sugar businesses across Europe and South Africa.

In fact, all the various food divisions put together account for some 75.2% of operating profits in 2021. True that reflects a tough time for Primark, where profits are little more than a third of what they were in 2019, but the diversity of earning streams has been a real boon in the last 18 months.

Given the disruption, the balance sheet is in a surprisingly healthy position. ABF has £1.9bn of net cash under the mattress, and net debt only reaches £1.4bn even if you include leases on the Primark store estate. That implies some very impressive cash conversion, and is something we greatly admire about ABF. The cash pile has led the group to declare a special dividend at the full year, and further returns are possible (though of course no t guaranteed).

Underneath the noise, ABF has a price-competitive retail product, diversified business interests and strong balance sheet. Future growth opportunities (particularly in the US) and weaker competitors mean we're optimistic about the longer-term picture. Ups and downs are to be expected in the shorter-term though, given ongoing disruption and well-publicised supply chain problems. The uncertainty is reflected in a lower than average price to earnings ratio.

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ABF key facts

  • Price/earnings ratio: 13.2
  • Ten year average Price/earnings ratio: 20.5
  • 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.

Full Year Results (at constant exchange rates)

The Retail business, a.k.a. Primark, saw revenue fall 5% to £5.6bn. That reflects the fact that stores were closed for a third of the year due to pandemic related trading restrictions. Operating profits fell 11% to £321m, although if you exclude the repayment of furlough funding, the group saw profits rise 15% to £415m. The improved operating margin reflects lower employee headcount, improved labour scheduling and other operating cost savings. The group expects Primark to recover at least £2bn of sales next year, as stores increase trading time, while adding new stores in Italy and Spain.

Grocery reported revenues of £3.6bn, up 3% year-on-year, with a particularly strong result in Twinings Ovaltine more than offsetting weakness in Allied Bakeries. However, operating profits fell 2% to £413m - with weaker margins in ACH, George Weston Foods and a £5m restructuring charge in Allied Bakeries.

In Sugar ABF saw sales rise 8% to £1.7bn and operating profits rise 75% to £152m. That reflects increased global sugar prices, that more than offset lower production in the year. South African business Illovo enjoyed a particularly strong year.

Agriculture sales rose 11% to £1.5bn, with operating profits up 7% to £44m. Ingredients sales rose 4% to £1.5bn with operating profits of £151m up 8%.

The group is seeing significant cost inflation in energy, logistics and commodities. The business believes it can offset most of that headwind through cost efficiencies, but may raise prices in its food divisions if necessary.

Free cash flow in the year came in at £862m, compared to £1.2bn in 2020. That reflects a significant increase in working capital year-on-year. Net debt including leases fell from £2.1bn a year ago to £1.4bn.

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.