Why ABF's share price is cheap and attractive right now

This one-time FTSE 100 favourite has been through some tough times, but the future is looking much brighter and the shares are cheap, says David J Stevenson.

The stockmarket can be a very hard taskmaster. Companies that disappoint it after many years of steady improvement often see their shares take a hammering. In addition, if those firms operate in areas where sentiment has soured, the result can prove very messy.

For long-term investors, though, this is where opportunities arise.

Cue FTSE 100 index member Associated British Foods (ABF). To call it “the biggest company most people have never heard of” may be rather hackneyed, but it wouldn’t be too far off the mark.

The group owns several world-class businesses that are individually more familiar than its own name. The firm originated from a bakery founded in 1935 by Garfield Weston. Expansion led to the creation of Allied Bakeries, which became one of the UK’s leaders in industrial baking. In turn, acquisitions and international growth brought about the formation of ABF in 1960. To cut a long story short, the group today has five divisions operating in 53 countries around the world and employs 128,000 people.

Groceries to clothes

The grocery division is a global leader – in the UK its products are used by nine out of ten households. ABF may not be a household name, but its brands, such as Twinings and Ovaltine, certainly are. AB Sugar is one of the world’s largest sugar producers. AB Agri is a top international agri-food business that operates across the supply chain, producing and marketing animal feed, nutrition and tech-based products. ABF’s ingredients businesses are leaders in yeast and bakery ingredients, supplying the food, nutrition, feed and pharmaceutical industries.

Finally, there’s Primark, one of Europe’s largest fashion retailers and the UK’s largest clothing, accessories and footwear seller by volume. Primark has 398 stores in 14 countries, including 13 in the US. In November, it set out plans to get to 530 stores within five years, of which 60 will be in the US.

Decades of strong returns

Garfield Weston’s family still controls 55% of ABF via privately owned Wittington Investments, which in turn is 79% owned by the Garfield Weston Foundation. Historically, ABF has been a consistent multi-decade success story for all its backers. From a price of 78p at the start of 1983, the shares reached £36 each in December 2015 – a return of 46 times. What’s more, back in 1983 the group paid dividends of 4.7p per share. By 2018, the annual distribution to shareholders had grown to 45p per share, equivalent to compound payout growth of 6.5% per year. However, the last four years have seen the picture darken. In common with many firms, the dividend was axed in 2020 as Covid-19 struck. The shares have been sold down to less than half their 2015 level as investors have become disillusioned. So why could we now see a major recovery both in profits and stock price?

The recovery has begun

In the year to end-September 2019, the group made adjusted pre-tax profits of £1.4bn on revenues of £15.8bn, with adjusted earnings (ie, excluding profits and losses on assets and exceptional items) of 137.5p per share. Primark contributed £913m, around 60% of overall operating profits.

Then the pandemic sabotaged sales, causing earnings to crater. Unlike many clothing retailers, Primark has no online arm – it argues that the cost of dispatching goods and processing returns would mean that it would have to charge higher prices. So store closures brought clothing sales to a halt for long periods.

Total turnover was £13.9bn in both the years ending in September 2020 and 2021, down 13% from before the pandemic. Operating profit was down almost 30% and Primark’s operating profit amounted to just £362m in 2020 and £415m in 2021. However, ABF’s fortunes are now firmly on the mend.

The 28 February trading update said that first-half sales and adjusted operating profit should be “strongly ahead” of last year and ahead of the (pre-pandemic) six months to end-February 2020.

First-half Primark revenues are expected to be “well over 60% ahead of last year” at constant currency rates. We’ll have more details about this – and progress at the group’s other businesses – when the interim results are released on 26 April 2022.

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