Primark owner Associated British Foods (LSE: ABF) today released a trading update for its financial year ending 15 September. It said: “Our full year outlook for the group is unchanged with progress expected in adjusted operating profit and adjusted earnings per share.”
The shares fell as much as 4% in early deals, but have since pared losses to less than 1%, changing hands at around 2,250p, as I’m writing. This is 33% below their 52-week high of 3,371p and they’re now at a level last seen in 2013. Here’s why I believe the stock is a bargain buy at the current price.
Strong progress
The table below shows some of ABF’s key numbers for 2017/forecast 2018 and for 2013, when the share price was last at around its current level.
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| 2013 | 2017 | 2018 | |
| Group revenue (£m) | 13,315 | 15,357 | 15,750 |
| Group operating profit (£m) | 1,185 | 1,363 | … |
| Retail (Primark) (£m) | 514 | 735 | … |
| Grocery (£m) | 232 | 308 | … |
| Sugar (£m) | 435 | 220 | … |
| Ingredients (£m) | 7 | 125 | … |
| Agriculture (£m) | 47 | 50 | … |
| Central (£m) | (50) | (75) | … |
| Earnings per share (EPS) | 98.9p | 127.1p | 133.5p |
| Dividend per share | 32p | 41p | 43.75p |
| Price-to-earnings (P/E) ratio | 23 | 18 | 17 |
| Dividend yield | 1.4% | 1.8% | 1.9% |
| Return on capital employed (ROCE) | 18.5% | 20.5% | … |
As you can see, group revenue and operating profit, and EPS and dividend per share have all advanced nicely since 2013. ROCE has also increased from what was already a strong 18.5% in 2013. ROCE is a measure of how efficient a company is at generating profits from its capital and is much-favoured by legendary investor Warren Buffett.
One result of the current share price being at around the same level as five years ago, while the business has made strong progress, is that the P/E has come down from 23 in 2013 to 18 today (and 17 based on current-year forecast EPS). Historically, this is a cheap rating for ABF, which at times has traded on a P/E of as high as 30. Another result is that the dividend yield on offer has moved up from 1.4% in 2013 to pushing 2% for investors today.
A lot to like
In today’s trading update, ABF said strong profit performances from Primark, Grocery, Agriculture and Ingredients are expected to more than offset the adverse effect of lower EU sugar prices. Profits in the Sugar division can be volatile, this being a commodity business: 2013 was a bumper year with an operating profit of £435m (as shown in the table above), while 2016 was a lean year with a profit of just £34m.
As a conglomerate, there will always be some parts of the group performing better than others, but I view this diversification positively. Another big plus is the group’s geographical diversification, with two thirds of operating profit being earned outside the UK. Finally, Primark’s value positioning, together with strong brands in Grocery (including Twinings, Ovaltine and Patak’s) means the group has some strong defensive qualities.
Primary growth engine Primark continues to open new stores in the UK and Europe. More recently, it’s entered the US, where it’s sensibly expanding with restraint at this stage, as it learns about the market. I believe the outlook for Primark, supported by ABF’s other businesses, is bright and makes the current depressed share price a steal.
