As the proverb says, mighty oaks from little acorns grow, and that has certainly been the case for conglomerate Associated British Foods (ABF), which has transformed itself from a single bakery in 1935 to a group of market-leading food and clothing businesses.
Best-known for its Primark low-cost fashion stores, which are a feature of high streets up and down the country, the company also has a large grocery division, with nine out of 10 UK households using its brands, and a global ingredients business as well as producing sugar and agricultural products.
Even factoring in the pandemic, the firm has grown its earnings per share at an average of 7% per annum or thereabouts over the last 35 years, which is roughly twice as fast as the FTSE 100 index with remarkably little volatility and almost no down years.
During that time, the share price has risen more than 10 times and total shareholder returns including ordinary dividends, special dividends and share buybacks are almost 2,500%.
Yet for this kind of reliability, investors are currently being asked pay just over 11 times earnings for the year to next August even though growth could be faster than has historically been the case.
RETAIL POWERHOUSE
Out of a total of £20 billion of revenue for the year to August 2024, the Primark business accounted for £9.45 billion or just over 47% and was the main engine of growth, delivering a 6% increase against 4% for the group.
In terms of operating profit, Primark accounted for £1.1 billion or 55% of the group total of £2 billion as margins rose from 8.2% to 11.7% thanks to lower material and freight costs, although these were somewhat offset by higher labour costs and increased investment technology and digital marketing.
Although a poor summer meant second-half like-for-like sales of clothing in particular were negative, the firm still grew sales overall with a positive product mix, and its Click & Collect service seems to have achieved the impossible in the world of online retailing, generating both higher footfall and overall growth rather than cannibalising in-store sales.
As well as the UK and Ireland, Primark has stores across Europe and in the US, and management believes there is enough ‘white space’ for its expansion programme to contribute around 4% to 5% to annual growth ‘for the foreseeable future’, meaning overall sales and earnings could increase at a faster rate for the next few years.
A BROAD PORTFOLIO OF BRANDS
The grocery division, which makes up 20% of sales and includes well-known brands like Twinings, Ovaltine, Patak’s, Jordans and Mazola, is truly global spanning Europe, the US and Asia, and tends to grow slightly more slowly than retail but has a higher operating margin.
Sugar, ingredients and agriculture, which make up the other 30% or so of revenue, had a mixed year with positive results in the first two divisions held back slightly by the third which suffered lower sales in the compound feed business due to soft demand in the UK and China.
Sugar sales and profitability on the other hand were strongly ahead of the previous year thanks to higher beet prices in the UK and Spain, its two main markets, although a drop in prices over the summer means earnings for the current year will fall before picking up again in 2026, which is fairly typical for a commodity business.
The ingredients business is less volatile and higher margin, and the plan is to grow through building new plants, making selective acquisitions and expanding into specialist areas like enzymes and nutrition where growth is higher than yeast and bakery ingredients which are its core products.
BETTER TOGETHER
The question which arises every time we bring up Associated British Foods is ‘why don’t they float Primark as a separate company?’, which is reasonable given there would seem to be few synergies between clothing and food, but the founding Weston family have always maintained there is a strong case for being diversified.
In fairness, ABF financed the very first Primark store in Dublin, in 1969, based on the vision and entrepreneurship of its founder Arthur Ryan, who remained chief executive for 40 years, so the history of the two businesses is intertwined.
When he was asked by the city’s mayor at the opening of the first Primark in the US in 2015 if he ever thought he would get to Boston, Ryan replied he didn’t think he would get to Cork, yet with the Westons’ backing the business now has over 450 stores in 17 countries.
As the pandemic demonstrated, diversification is no bad thing, and whereas other retailers saw their earnings collapse, ABF group profits held up well and very quickly rebounded to top their pre-Covid levels, since when they have gone on to hit new highs.
These articles are provided by Shares magazine which is published by AJ Bell Media, a part of AJ Bell. Shares is not written by AJ Bell.
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