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Associated British Foods still recovering from lockdown slump

Store closures and the lack of an online purchase function led to £2bn in lost sales, with revenue and profit lagging behind pre-pandemic performance
November 9, 2021
  • Third of Primark trading days lost to store closures 
  • Surprise special dividend announced

Associated British Foods (ABF) resumed dividend payouts this year after 2020’s blank. The food processing and retail group announced an unexpected special dividend of 13.8p a share along with a final dividend, following July’s half-year payment. This was despite revenue-driving subsidiary Primark losing a third of its trading days due to store closures and the group posting flat revenue in its 2021 full-year results. Management said that strong financial leverage and improved cash retention drove the distribution decision.  

While the top line was nothing to write home about, statutory profit before tax jumped 6 per cent to £725m. This will rouse investors, but warning signs remain after pandemic restrictions savaged the business. While all stores reopened in spring, this was not enough to prevent like-for-like retail sales falling 12 per cent against pre-pandemic figures. Management estimates the loss of sales from Primark closures at some £2bn.

This highlights the issue of Primark’s lack of online sales function. While the fashion retailer’s website showcases products, customers must still purchase in-store. This is an obvious competitive disadvantage, especially in an age of retail restrictions.  

Management said that a new “customer facing” website is in development and will launch in the first quarter of 2022. There is no news of any move toward offering an online sales channel, however. Rather, there are plans afoot to drive forward the group’s physical presence with a focus on overseas markets. Management estimate that the store estate will reach 530 outlets from the current 398 over the next five years, a 33 per cent increase which it hopes will drive future revenue growth.   

The grocery operating segment, which contains the Twinings teas and Ovaltine businesses, benefited from a pandemic boom last year and outperformed retail. Although it has since fallen back as retail recovered, it posted 3 per cent revenue growth to reach £3.6bn of sales on a constant-currency basis. But adjusted operating profit fell with weaker margins and £5m of Allied Bakeries restructuring costs. Twinings’ expansion into wellness teas and Ovaltine’s growth in international markets looks promising for future performance.

Consensus forecasts from FactSet indicate adjusted EPS of 140p and 151p a share for 2022 and 2023, up from this year’s 80p. But supply chain uncertainty – management expects this to be “broadly mitigated” by a weaker dollar – and possible future retail restrictions are key doubts. Exceptional costs of £151m, mainly plant and equipment impairment in the sugar segment, are still uncomfortably high. Hold.

Last IC view: Hold, 2,390p, 20 Apr 2021

ASSOCIATED BRITISH FOODS (ABF)  
ORD PRICE:1,953pMARKET VALUE:£15.5bn
TOUCH:1,950-1,954p12-MONTH HIGH:2,528pLOW: 1,618p
DIVIDEND YIELD:1.4%PE RATIO:32
NET ASSET VALUE:1,253pNET DEBT:14%
Year to 18 SepTurnover (£bn)Pre-tax profit (£bn)Earnings per share (p)Dividend per share (p)
201715.41.5815241.0
201815.61.2812845.0
201915.81.1711146.35
202013.90.6957.6nil
202113.80.7360.526.7
% change-1+6+5-
Ex-div:16 Dec   
Payment:14 Jan   
NB: dividend yield does not include special dividend of 13.8p a share (same dates apply)