I’ve always viewed Associated British Foods (LSE: ABF) with mixed feelings, though I’ve been generally upbeat. Now that it’s fallen 30% since mid-February, I’m seeing a FTSE 100 share price that’s offering tempting long-term potential.
The firm’s ownership of Primark has always seemed a little odd to me. It’s not really the kind of subsidiary you’d expect to find in a food-processing multinational. I’ve always been wary of companies that cover multiple disparate businesses, and I generally prefer ones that focus on the one key thing that they’re good at.
Top FTSE 100 share
But there’s no denying that Primark has been the jewel in the crown for Associated British Foods. The food business has been doing well enough. But every time results come around, I immediately head for Primark’s figures. And Primark provided 60% of overall operating profit last year. If it existed as a separately listed company, I’d probably have bought some years ago.
But right now, if Primark had a FTSE 100 share price, I expect it would be a crushed one, along with so many in the retail sector.
Before the Covid-19 pandemic, Primark was enjoying monthly sales reaching around £650m. With all of its UK, US and European stores now closed, that’s dropped to zero. Unlike many high-street competitors, Primark has no online offering to help keep sales going. The firm has always said it couldn’t keep its prices so low if it had to offer home delivery, and those super low prices provide Primark’s key competitive advantage.
Balance sheet
But ABF’s food business, with its highly defensive nature, is coming to the fore now. We had first-half figures Tuesday, and all the revenue and profit figures were fine. They are to the end of February, mind, and don’t say much about how the full pandemic-blighted year will turn out.
When I look at a FTSE 100 share now, having seen so many crash so hard, the profit figures are not my priority. No, the companies that will surely suffer the most long-term damage are the ones that will struggle to service their debts if the lockdown continues too long. So it’s the balance sheet that draws me now.
On that front, I think Associated British Foods is looking like a safe FTSE 100 share. The company was carrying net debt of £2,751m at 29 February, but that does include lease liabilities. With lease liabilities excluded, ABF had £801m in net cash.
Cash preservation
To help preserve cash, the interim dividend has been halted. The board members have taken big pay cuts too, with executive directors shaving their pay by 50% and foregoing bonuses.
Generally, ABF’s food businesses have been doing just fine, and I don’t see that changing. And when the stores are allowed to open again, I think Primark will carry on from where it left off. We mustn’t, though, forget the risk that this could still be a long way away.
Associated British Foods shares are now on a trailing P/E of 13.7, with forward multiples for this year not being much use right now. I still fear we could see a second fall in FTSE 100 share prices. But overall, I rate ABF as a long-term buy now.
