The share price of FTSE 100 constituent Associated British Foods (LSE: ABF) was lower in trading today. This followed the release of a trading update in advance of the end of its financial year.
What’s got the market so concerned?
Sales fall as ‘pingdemic’ bites
It all seems to be down to how the company’s Primark business has been doing.
Initially, things look pretty positive. This morning, ABF announced that Q4 adjusted operating profit from its retail arm was now likely to be higher than originally thought. As a result, full-year profit would also be ahead of last year. Primark’s margins also held up well due to a fall in costs.
However, lower than expected sales had been recorded at the FTSE 100 stock’s clothing shops. This was blamed on reduced footfall due to measures taken to address the spread of the Delta variant of Covid-19. This includes the now infamous ‘pingdemic’ period in which huge numbers of people were required to self-isolate.
Abroad, sales at Primark were also impacted by reduced tourism in countries such as Spain and Portugal.
Is it really that bad?
I don’t think so. While news of lower sales was never likely to be embraced, ABF said that trading at Primark had actually improved across the quarter. A 24% fall in like-for-like sales at the start of Q4 had reduced to an 8% decline in the last four weeks. Thanks to this, it now expects sales over the final three months to come in 17% lower than two years ago. Sure, that’s not great. However, the reasons for this recent negative momentum appear temporary.
In line with this, the company expects to continue opening new Primark stores around the world, especially in Spain and Italy. A refreshed customer-facing website, allowing shoppers to see more of the range as well as its availability in stores, is also in development. I see this as an essential move given the competition it faces from online-only operators.
Of course, ABF is also more than just Primark. The company’s sugar business, for example, is expected to register “an even greater improvement” in adjusted profit compared to last year. Elsewhere, brands such as Twinings and Ovaltine have been performing well, and the same goes for ABF’s ingredients and agriculture arms.
Cheap FTSE 100 stock
I remember highlighting ABF as being too cheap back in November. Its share price went on to climb as high as 2528p (roughly +28%). Now that these gains have been given up, I’m inclined to return to my original thesis. Analysts are expecting earnings per share to almost double in FY22, giving ABF a forward P/E of just 14.
This is not to say that aren’t problems ahead. Supply chain issues and raw materials inflation could get worse before they get better. The fact that UK sugar production has been a lot lower this year due to poor weather shows how uncontrollable events (other than the pandemic) can also hit other parts of its business.
Still, ABF’s diversified model arguably makes it more defensive than some of its high street competitors. Moreover, the company looks set to end the financial year in a solid financial position. Net cash should come in around £1.9bn. That’s up £300m on this time last year.
Once again, I’d be interested in acquiring a stake in ABF at this level.