As soon as shops reopened last month, queues could be seen outside Primark. It’s a hugely popular part of the high street and a mainstay for many. It’s not possible to buy shares in Primark outright, but it’s possible to invest in its parent company Associated British Foods (LSE:ABF). Uncertainty lies ahead while Covid-19 lingers, but the £19bn company has a powerful brand in Primark. Therefore, I think it’s likely to enjoy a strong recovery over time. The ABF share price has endured a volatile year. But since hitting a low of £16.18 in October, it has risen 41%.
What does Associated British Foods do?
FTSE 100 constituent ABF also has a food ingredients division from which it sells yeast, bakery and speciality ingredients for the food, feed and pharmaceutical industries. It’s the largest sugar producer in Africa and the sole processor of UK sugar beet. Additionally, it has an agricultural division and a grocery division. Well known ABF brands include Twinings, Silver Spoon and Kingsmill, but its crowning glory is fast fashion chain Primark. Unfortunately, Primark doesn’t have an online division so the forced closure of its shops in lockdown destroyed a major ABF revenue stream in 2020 and earlier this year. In fact, Primark closures amounted to losses nearing £650m.
Going forward, the company is planning on focusing more intently on Primark maternity, baby and home (as well as its usual focus). These are areas with an evergreen target market seeking affordable goods. I also think this shows ABF is making the most of areas previously dominated by competitors. With Covid-19 destroying so many high street retailers, Primark is primed to fill any gaps.
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Why I’d buy ABF shares
I’m really impressed by the power of the Primark brand and don’t see that diminishing any time soon. Meanwhile, commodity prices are rising, and I believe pressure on agriculture to meet rising food demands spells further growth for the wider group too. The company noted a rise in profits across all its food segments, Grocery, Sugar, Agriculture and Ingredients, last year. Although this may well decline as the reopening encourages people to eat out.
During its recent April earnings call, company executives noted they’re reassuringly seeing signs of a consumer boom rather than a recession in Australia. This was particularly noticeable in its Twinings range where ABF is a market leader in the Australian tea market. The board must feel a certain level of confidence as it’s committed to paying back £121m in government furlough money and reintroduced a dividend at 6.2p.
Of course, buying ABF shares is not without risk. The group remains at the mercy of Covid-19 and is also under pressure to reduce its carbon footprint. It must also ensure it meets environmental, social, and corporate governance (ESG) standards that are becoming an ever more prominent concern for shareholders. The ABF share price has only risen 3% year-to-date, which is less than the FTSE 100 at 7%.
It’s a long-established company, having listed on the London Stock Exchange in 1994. Plus, it’s still family controlled. For all these reasons, I like this company and would happily add ABF shares to my Stocks and Shares ISA.
