More on Associated British Foods
Associated British Foods H1
Associated British Foods’ (ABF) sales growth was largely driven by acquisitions with only discount clothing retailer Primark (which makes 22% of operating profits) generating much organic sales growth (+c12%) as well as strong organic operating profit growth (+c18%). ABF’s grocery business (33% of operating profits) which produced little organic sales growth (+c1.5%) did produce strong organic profit growth (+c10%) driven by lower costs and higher sales of branded products. Acquisitions more than offset the effects of a minor disposal, boosting total sales growth in groceries to 7% and improving margins.
ABF’s remaining major business, primary food and agriculture, was little changed but performance was mixed over product and geographic areas. The new EU sugar regime remains undecided and is likely to mean lower margins in the future. The ingredients business has been doubled in size by a major acquisition Of a yeast producer) but again the underlying results show low growth.
The strong performance of Primark and the more lower growth ABF’s food businesses was expected, and reflects the nature of the different businesses. The strong performance of the grocery business is encouraging but the sugar business is harder to judge and the combined ingredients business remaines relatively new. Primark’s growth as evenly driven by strong like-for-like growth (6%) and expansion. The like-for-like growth and a significant strengthening of operating margins (up 64 basis points to 13.17%) occured despite prices falling 5% which suggests Primark’s business model is robust in the face of the competitiveness of the discount clothing market. With 121 stores (at the year end) Primark has room to expand and it plans to continue new openings.
At the current price of 762p the 14.5× prospective PE is expensive for a food producer (as is the historical EV/EBITDA of close to 10×), although reasonable for a clothing retailer. ABF is producing good growth by the standards of the former sector and reasonable growth (more stable and sustainable than that of most peers) by the standards of the latter sector.
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