For years, it made profits at Associated British Foods sparkle. The FTSE 100 group’s ownership of Primark more than compensated for underperformance elsewhere, in particular in its sugar business. Now, however, the coronavirus pandemic has changed everything.
With all 376 Primark stores in 12 countries closed and with no online operation to turn to, the clothing chain’s sales effectively have been reduced to zero, accounting for lost turnover worth £650 million a month. With no end to national lockdowns in sight, certainly in Britain, it means that profits at ABF will be hit hard in the short term. It’s just as well that Primark is not the only business in its portfolio.
Associated British Foods was created in 1935 as Food Investments, after which it almost immediately changed its name to Allied Bakeries, taking its present title in 1960. The history of the group, which employs roughly 130,000 staff in 50 countries, has been characterised by acquisitions, including of British Sugar in 1991 and Patak’s, the Indian foods company, in 2007.
It is modestly good news for investors that Primark, founded in Dublin in 1969, is one of five divisions that Associated British Foods operates. The others — grocery, ingredients, agriculture and sugar — are all still up and running.
To be clear, the shuttering of Primark stores is, as analysts at Shore Capital aptly described it, a body blow. The retailer accounted for more than 49 per cent of the overall group’s £15.8 billion in revenues last year and just under 61 per cent of its adjusted operating profit of £1.5 billion.
Assuming, as seems reasonable, that trading is impossible for three months, then Primark suffers lost revenues of £1.95 billion and a fall in gross profit of £825 million, based on estimates from Shore Capital.
ABF reckons that it should be able to save about half of its operating expenses through a combination of rent concessions, cancelled future stock orders and furloughing staff. Even taking account of this, however, analysts at Credit Suisse reckon that over three months it would lose £167 million in bottom-line profit. That is significant, but still equivalent to less than 15 per cent of last year’s pre-tax profit of £1.17 billion for the group. While it may take time to recover, it seems clear that Primark’s model — and that of the overall group — still holds. Consumers will still want to buy good-quality clothes at bargain prices.
In the meantime, the other parts of the business probably are faring reasonably well. The grocery and ingredients divisions, which make yeast, drinks such as Twinings and Ovaltine, as well as Ryvita and Jordans cereals, are likely to have benefited from consumers’ recent extra shopping. Demand for animal feeds should have held firm and, with the price of sugar tending to fluctuate over the longer term, there is every reason to believe that profit at this division will continue to recover strongly this year and next.
The outlook for the dividend is less clear and Associated British Foods has been conspicuously silent on the matter in its recent updates. In truth, even if it cuts or abandons the payout — the half-year results are due next week — the dividend is not the main reason for owning shares. Even at present low share prices, the dividend yield based on next year’s forecast is only 2.3 per cent.
The main reason to own the shares, which were up 47p, or 2.4 per cent at £19.92, is the diversity of its earnings, which surely will recover when Primark reopens. Trading for just 12.9 times forecast earnings, investors should hold firm.
ADVICE Hold
WHY The closure of Primark stores will sharply dent profits but the group should bounce back relatively quickly when they reopen
Asos
Asos moved quickly to raise money from investors to help to give it a financial cushion during the pandemic. The online fashion retailer raised more than expected, £247 million, from a placing last week, and at a price slightly above the previous night’s close. With Covid-19 making a dent in sales, it clearly felt the need to raise the money, but denied speculation that it was within months of running out of cash.
Asos sell its own brands, as well as clothes produced by other designers, including Noak, Reclaimed Vintage and Heart & Dagger. The company was listed on Aim in 2001 for 20p a share, subsequently growing rapidly. However, it surprised investors in December 2018 with a profit warning, followed by teething troubles building new distribution warehouses in Atlanta and Berlin and disappointing sales in several markets, including France and Germany.
There was plenty to be positive about in the retailer’s results for the six months to February 29, though, brought forward to accompany the placing last week, including a sharp increase in pre-tax profit mainly thanks to cost-cutting and a 20 per cent increase in sales in its main British market.
At the same time, a drop in group sales of between 20 per cent and 25 per cent over the previous three weeks shows that even online retailers are not immune from consumers’ retrenchment.
Asos states that the proceeds from the placing, together with extending its credit facilities by up to £80 million, mean that it has sufficient funds in place to sustain it if there is no improvement in trading for the next 18 months at least. That is reassuringly long in such an uncertain climate.
The group’s interim results suggest that, aside from the impact of coronavirus, it has returned to form, although it still pays no dividend. The shares, up 118p, or 5.6 per cent, at £22.32 yesterday, trade for just over 90 times’ Stifel’s forecast earnings.
While this column has previously been a fan of the company’s shares, in these uncertain times they have little allure at that price.
ADVICE Avoid
WHY Shares look expensive against the backdrop of uncertainty and weak markets
