Shares in food and retail conglomerate AB Foods (ABF), a recent Shares recommendation, jumped 7% to £19.85 as investors looked past the tough trading conditions of the last 12 months to a ‘much improved’ margin and profit outlook for its fast-fashion chain Primark in the coming year.
Group revenues for the 53 weeks to mid-September were up 1% to £13.88 billion on a constant currency basis with food sales up 5% due to a very strong performance in the sugar business while Primark’s like-for-like sales were down 12% on pre-pandemic levels.
At the operating level it was a better picture, with profits in the food business up 10% and Primark profits up 15% thanks to a strong recovery in margins in the second half of the year.
POSITIVE OUTLOOK
Despite the difficult conditions, the firm continued to invest for future growth with the expansion of its grocery brands particularly in developing markets and new facilities for its ingredients and agricultural products divisions.
At Primark, typically the part of the business most investors focus on, retail selling space increased with the opening of 15 more stores and new inventory management and point of sales systems were rolled out, together with the expansion of its state of the art Dutch warehouse.
Looking ahead, chairman Michael McLintock said he was confident Primark would recoup all of the £2 billion of sales lost due to the pandemic and would expand further in its key markets of Italy and Spain, driving operating margins back above 10% in spite of increasing input costs.
HIGHER RETURNS
The firm also unveiled a new capital cash allocation policy, giving it scope to increase its shareholder returns. As a taster of things to come, thanks to its balance sheet strength and confidence in the future, the firm announced it would pay a 13.8p special dividend on top of the interim and final payouts, taking the total distribution to 40.5p per share.
Going forward, leverage or net debt to EBITDA (earnings before interest, tax, depreciation and amortisation) is expected to be no more than 1.5-times at the half year and the full year, although in ‘exceptional’ circumstances it could top that level for a short time. In September the ratio was 0.7-times, hence the decision to pay a special dividend.
As well as a low level of net debt, the firm had a net cash balance before lease liabilities of £1.9 billion, giving it plenty of resources to continue funding its expansion either from cash flow or from reserves.
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