When I last wrote about Associated British Foods (LSE: ABF) in October 2022, I declared it a no-brainer buy. Back then, its share price was trading at levels not seen since 2012, and an astonishing 21% lower than during the Covid crash. Three months later, the share price has risen 50%. However, despite this rise, I still maintain this FTSE 100 foods-to-fashion conglomerate to be a bargain.
Record Christmas at Primark
Primark enjoyed a very strong Christmas period. Like-for-like sales were up by 11%, supported by higher volumes and prices as well as a more normalised level of markdown.
The UK led the way with sales over the festive period up 15% compared to last year. Nearly all this increase was attributable to like-for-like growth. Trading across Europe, which earlier in the year had disappointed, bounced back strongly and rose 8% compared to the same period last year.
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Unsurprisingly, profit was lower than last Christmas. This was driven by rising inflation, freight rates, labour and energy costs. A strong dollar was also a drag.
Inflationary hedge
While Primark’s profits may be squeezed by rising inflation, other parts of the group benefited from higher prices. Year-on-year, sugar revenues rose by 31%, agriculture by 19% and ingredients by 36%.
Indeed, ABF’s eclectic collection of businesses, I believe, is one of its unique selling points. There’s no other company I know of that can claim to manufacture enzymes and animal feed while selling bikinis and make-up!
However, the group’s diversity does make valuing the business difficult. Using traditional metrics such as price-to-earnings, in my opinion, fails to reflect how different parts of the group ebb and flow through stages of the business cycle. Therefore, it’s unlikely that all divisions will be firing on all cylinders at the same time.
Risks
Given that nearly 50% of ABF’s revenues come from Primark, it’s vital for me to understand the risks in that part of the business.
Back in September, it announced its intention not to implement further price increases going into 2023. It took the view that maintaining price leadership and affordability mattered more than falling profit margins.
A clear danger for ABF is, if we enter a stagflationary environment, goods could go unsold. That said, after the lockdowns when its stores reopened, it demonstrated its ability to clear inventories that had built up.
Yes, the company has invested and continues to invest in ramping up its digital offering. But on the whole, it remains a stores-based business. For me, this is a compelling proposition.
The high street is evolving. But predictions of its death have been shown to be way off. Labour disputes at Royal Mail undoubtedly hurt pureplay internet businesses over the crucial Christmas period. People preferred to go and shop for products themselves. I don’t see this trend unwinding any time soon. Besides, Primark drives footfall into shopping centres.
In today’s tough economic environment, I’m looking for businesses with proven business models, excellent cash generation and conservative management. ABF delivers on all these fronts. That’s why I recently bought more shares for my portfolio.
