Were it not for the Weston family owning most of the shares, the chances are that Associated British Foods would be a very different beast.
It owns Primark, the world-beating discount fashion chain. But it also has a groceries business with a smattering of well-known brands including Kingsmill bread and Twinings tea. And a sugar business that includes British Sugar. And an ingredients business producing things like yeasts and enzymes and antacids for the food, brewing and pharmaceuticals industry. Oh, and an agriculture business that makes animal feed, originally out of its leftover sugar pulp.
The point is that if investors want to own Primark, they also have to own a lot of stuff that comes with it. For a label often pejoratively referred to as “throwaway fashion”, Primark comes with a lot of packaging. Yet the case for owning Primark was burnished even further yesterday. Its sales were up 11 per cent on last year, or 21 per cent if a boost from the fall in sterling is allowed. More important was a single line stating that its newest store in the United States, on Staten Island, New York, was performing “very well”.
International success stories are rare in fashion, quoted international success stories almost unheard of. In the first half Primark contributed half of ABF’s operating profits and, it is fair to assume, far more than half its stock market value. But there was very little to keep investors awake at night at the rest of the business. The groceries division posted a handy 20 per cent improvement in its contribution to operating profits, while profits at the smaller ingredients business rose by 50 per cent to £61 million.
The sweetest performer was the sugar division, which was barely profitable in the first half of 2016 but hit £123 million this year. Tighter European Union stock levels supported higher prices, which George Weston, chief executive, does not see changing soon.
Primark will naturally starve the sugar division of sunlight, but that may imply that the “boring” bit of ABF is undervalued. There are risks further down the line for the sugar business post-Brexit, though in the meantime investors should enjoy the happy coincidence that the stuff that comes with Primark might be worth owning in itself.
My advice Buy
Why Primark is still roaring away and ABF’s other divisions are now backing it up. At 19 times this year’s forecast earnings, it’s worth it
Segro
With airport capacity a thorny issue in Britain, Segro sits in the enviable position of owning prime warehouse space in the country’s biggest, Heathrow, which the property developer has often referred to as its “crown jewels”.
Segro, formerly known as Slough Estates, took full control of the Airport Property Partnership in the last quarter, when it bought Aviva’s 50 per cent stake for £365 million. The APP vacancy rate stands at 7.5 per cent, with an average lease length of 11 years, highlighting the stability of the income the business provides. The vacancy level is relatively high compared with Segro’s cross-company average of 5.6 per cent, a sign of demand for its well-situated developments.
Of course, the attractiveness of the portfolio is reflected in the price — Segro trades at a relatively tight net asset value discount compared with the average for British real estate investment trusts — but with a pipeline of new properties coming on line, it also offers strong growth potential.
At the share price of more than 480p, Segro looks close to fair value, although there is reason to think it could push higher as investments come good.
My advice Buy
Why Strong underlying portfolio with good potential
Royal Bank of Scotland
When a company’s largest shareholder says it wants to sell, and at pretty much any price that isn’t derisory, then a wise investor would avoid the stock in question. Royal Bank of Scotland shares have suffered under the weight of the mother of all overhangs since the taxpayer bailed it out nine years ago and comments by Philip Hammond suggest that the chancellor is gearing up to dump the 73 per cent holding.
With the relatively sure and certain knowledge of an incoming downpour of RBS shares, there is little reason to buy and this is before all the other uncertainties facing the bank, such as a multibillion-dollar settlement with the US authorities over the sale of toxic mortgage-backed securities and a shareholder lawsuit over its 2008 £12 billion rights issue, are taken into acount.
That said, RBS is worth keeping an eye on as at some point the shares will be a “buy”, particularly as capital accretion suggests a return of dividend payments in the next few years. At least some of the £11 billion sitting in the litigation reserve could be paid back to shareholders should it prove able to strike a better deal with various claimants than it expects.
In this sense, Mr Hammond’s apparent realism over the need to sell the shares could be the catalyst needed to move the price. After all, to think that the stock could be sold for anything like the price at which it was acquired is ridiculous because of the disposals the bank has had to make.
My advice Avoid
Why Share sale will help remove overhang but could be disruptive in short term
And finally . . .
Shares in Fenner were boosted after the polymer technology business reported a rise in revenues and profits that led to a more than doubling in the company’s underlying earnings per share to 6.3p. Fenner said that it would lift its dividend 40 per cent to 1.4p per share, helping the stock to close up 6.6 per cent at 347¼p. The strong earnings come after a restructuring that has helped to widen operating margins by more than two percentage points to just under 8 per cent on the back of efficiency gains.