More on Associated British Foods
ABF: Littlewoods acquisition
Associated British Foods is acquiring Littlewoods’ chain of 120 high street. Some stores will be sold, the remainder will be converted to Primark, leading to an increase in the number of Primark stores of nearly 40% and an approximately 35% increase in the amount of selling space.
Primark already generates nearly a quarter of ABF’s operating profit and is its fastest growing business. It is now likely to become the largest single business and be the main driver of growth.
ABF is spending a total of around £375m on a 35%-40% expansion of a chain that is currently generating operating profits of around £120m a year, so, it appears reasonable to expect good returns from this investment and a noticeable boost to ABF’s profits fairly rapidly. Assuming ultimately similar margins to the current chain we are looking at an ROI of over 10% - obviously this is a very rough estimate but the number is high enough to leave room for error.
We have already discussed Primark’s consistently strong growth in our previous comments on associated British Foods. Given that Primark is very much a discount retailer we expect to be robust in the face of currently slow consumer spending, and the format also clearly has room to be rolled out to far more locations.
At 837p Primark is on a PE of 15× 2006 earnings and is yielding 2%, which is not cheap either for a clothing retailer or a food producer (the food businesses generate the other two thirds of ABF’s profits). On the other hand Primark gives it a stronger growth driver than peers in either sector and even its food businesses have increased profits thanks to a better sales mix.
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