AB Foods is well set up for a socially distanced world despite Primark’s online absence

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Associated British Foods PLC (LON:ABF) is well set up to perform in a socially distant world, even though its clothing retail arm has no online offer.

Not only did the FTSE 100 group reveal a surprisingly strong level of cash, not far off double the GBP750mln level it had guided back in July, but several parts of the family-owned conglomerate are thriving.

For the Primark business, the latest four-week period of UK industry data showed the budget fashion chain had enjoyed its highest ever market share in terms of value and volume for this time of year, despite the accelerated shift of clothing consumption to online.

Trading in the period “highlights how well-placed Primark’s in-store set up is for a socially distanced world,” said analyst James Grzinic at Jefferies.

“A relative attraction that should accelerate as incomes are squeezed into the Autumn/Winter season.”

He predicted the chain should now have “an ample runway” going into its new financial year, especially as many high street rivals close stores amid a rash of collapses and CVAs, which should help Primark “secure a growing share of a challenged offline market”.

Some of the recent boost for Primark will have been the result of significant pent-up demand, pointed out Richard Hunter, head of markets at Interactive Investor, who also noted that many of the group’s flagship city centre stores are largely reliant on tourist revenue which has all but evaporated in the pandemic, which has also had an inevitable effect on high street and shopping centre stores, although there has been some mitigation with an increase in business at retail parks.

But record recent numbers should undo some of the damage suffered during the lockdown, Hunter said, when store closures were estimated to have resulted in lost revenues of GBP650mln per month.

“The company can’t rely on digital sales to make up for the shortfall, as it does not have an online presence to speak of,” said Susannah Streeter at Hargreaves Lansdown.

“That is certainly a challenge given the accelerating shift to online we have witnessed since the start of the pandemic. But it appears Primark customers still remain remarkably loyal, lured by the chain’s fashion credentials and value offering.”

Based on such demand and expectation that global demand will continue to recover, the company’s four openings in the fourth quarter to bring the total estate to 384, are to be followed by 14 store openings in the new year, with four in Spain, three in the US, two in Italy, and one each in the UK, France, Netherlands, Poland and Prague.

“At a time when other major clothing retailers are restructuring and closing down huge numbers of bricks and mortar stores, Primark’s growth in footprint is remarkable,” says Streeter, who like many sees continued global expansion as key to the future.

The lockdown showed the resilience of the ABF model, as the group’s diverse business lines picked up much of the slack left by Primark’s closures, with grocery revenues increasing from the first to the second half of the year due to higher retail demand, sugar sales coming in well ahead of last year and agriculture profits also improved.

A net cash balance that is expected to stand at GBP1.3bn at the year end puts the group in a strong position, the analysts all agreed.

Jefferies’ Grzinic eye “considerable” free cash generation next year, something he feels is under-appreciated given a share price that is 15 times forecast 2021 earnings and a free cash yield of around 7% with net cash set to increase to close to the GBP2bn mark in the year ahead.

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