Associated British Foods: An Inexpensive Defensive Consumer Play (OTCMKTS:ASBFY)

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Hollie Adams

Associated British Foods plc (OTCPK:ASBFY) is a diversified international food, ingredients and retail group with sales of £13.9 billion, 128,000 employees and operations in 53 countries across Europe, Africa, the Americas, Asia and Australia. Its purpose is to offer secure, nutritious, reasonably priced food, and clothing that’s great value for money. With the breadth of its business, its brands and global reach, ABF goals to consistently deliver value to its stakeholders. Its business is split into five segments: Grocery; Sugar; Agriculture; Ingredients; and Retail. From a bakery founded in 1935, to grocery stores and a clothing brand, the evolution of ABF is considered one of considered expansion, growing popular brands and making acquisitions in adjoining businesses and markets for over 85 years.

The outlook for retailers of non-essentials, the following 12 months goes to be one other difficult one, about surviving and organising for future thriving. This 12 months, ABF, whose prime asset is Primark, the budget homewares and clothing chain, has a high probability of slipping into earnings losses. The important thing query within the short term is that if this has been factored within the stock price already, in spite of everything the stock is down 23% for the reason that start of the 12 months. Full 12 months results for financial 12 months 2022 were released on the eighth of November and delivered strong revenue and profit growth this 12 months in a transparent demonstration of the advantages of the group’s diversification and brand strength.

Nonetheless, looking ahead, economic conditions are difficult and the outlook for consumer discretionary spending may prove to be weak within the near term. It’s likely sales could be higher over the following 12 months (financial 12 months to the top of September), given the power of Primark and its food-related businesses to implement higher prices. Moreover, with an Altman Z-Rating of three.1, ABF is robust enough to fund its declared £500 million share buyback programme.

The chance goes to be margins because of cost inflation. Higher energy and wage bills will probably push profits below the £1.435 billion adjusted operating profit of FY 2022. I feel adjusted operating profit will likely drop by around 5%.

The market is taking a more pessimistic view. An enterprise value of only 4.6x adjusted EBITDA is towards the very bottom of the ten-year range. Granted this does reflect the uncertainty of just how revenue will perform when consumer spending is squeezed over the approaching months. Nonetheless, it is a short-term view and equity is a long-term investment. We’d like to account for ABF’s financial strength and the longer-term opportunities which can be on the table from expanding Primark in the US.

Also, it seems to me the market tends to disregard ABF’s non-retail businesses a variety of the time, despite the fact that they made up almost half of adjusted operating profits this 12 months. The sugar segment, ABF’s third largest by revenue, is benefitting from higher commodity prices. Together with the quite resilient profits from the agriculture and ingredients segments, adjusted operating profits for non-retail ought to be up on last 12 months.

ABF’s retail segment Primark is what the market pays attention to, as within the UK it’s essentially the most visible asset, with stores in most big towns and cities. This segment’s adjusted operating margin for FY23 will probably be below 8%, when it is often about 10%. Freight costs, while still double pre-pandemic levels, are down significantly from the seven times higher they were at their height last 12 months. Also, importantly, the value of cotton, material for Primark, also has come down. Energy costs are still a risk as is a stronger dollar for Primark, which buys a majority of its goods in dollars and sells mostly in kilos and euros.

Primark has recognised difficulties in Germany and took a £206 million impairment last 12 months, because of a better cost base and pressure on revenues. The business is in negotiating with unions on costs.

Nonetheless, Primark is committed to market share and low costs, as that’s its differentiation for the patron within the marketplace and what has made it successful and thus won’t put up sales prices next 12 months beyond the raises already planned. I feel that is a superb strategy, in a bleak economic environment, many consumers will downgrade to most price competitive wares.

That is already playing out with Primark noting in recent weeks lower average basket size is being offset by higher customer numbers. As energy bill rise sharply over the winter and next 12 months, it could be the consumer will purchase more low-cost warm clothes to try to maintain energy bills down, so Primark’s low-cost jumpers and coats are certain to do thoroughly in the course of the energy crisis.

Normally, I can be concerned by inventory levels that are about 50% higher than last 12 months, but that is only a base effect – when supply chain disruptions meant inventory levels were artificially low last 12 months. Current inventory levels are 36% higher than in 2019, following a 12 months through which sales were only about 7% lower than those recorded last 12 months. So, there may be a slight risk that Primark might need to discount more goods to sell them.

Primark is planning to expand within the US, Italy, Iberia and France, and this could increase the variety of stores to 530 from 408.

Traditionally shunning e-commerce to guard margins, a latest web strategy last week saw its website crash on far higher than expected demand. Primark’s brand may be very strong.

Valuation

ABF continues to be cash-generative and even with lease liabilities included. Financial leverage is just 0.8x and is anticipated to rise to 1x, according to the corporate’s goal.

ABF trades on a forward PE of 13x and EV/EBITDA of just 6.6. The group has an honest Piotroski F-Rating of seven out of 9. All this means

ABF is a thoroughly placed relative to other discretionary retailers and food retailers in its ability to weather a recession. The stock is defensive. ABF’s low-cost valuation greater than compensates for the risks it faces.

Editor’s Note: This text discusses a number of securities that don’t trade on a significant U.S. exchange. Please concentrate on the risks related to these stocks.


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