I’ve long been fascinated by the FTSE 100‘s Associated British Foods (LSE: ABF). And that’s mainly because the most-profitable division within the enterprise is the Primark clothing retail chain.
For example, in 2019 before the pandemic, around 64% of the firm’s operating profit came from the Primark division. The grocery division delivered 27% of the total that year and the rest came from the sugar, agriculture, and ingredients divisions.
The company has a majority shareholder
The company’s consumer food brands include Twinings, Allinsons, Jordans, Kingsmill, Patak’s, Ryvita, and Silver Spoon. And I’m keen to invest in fast-moving consumer goods businesses. That’s because they tend to have defensive qualities and the potential to trade well through economic downturns. So, the grocery and retail (Primark) divisions balance each other to some extent because retail can be a more cyclical activity.
However, I’m not the only investor to appreciate the attractions of Associated British Foods. Although the company has a FTSE 100 listing, it’s actually majority-owned by Wittington Investments Ltd, which holds around 55% of the shares. And Wittington itself is majority-owned by an English charitable trust called The Garfield Weston Foundation. The trust has just over 79% of Wittington’s shares.
And as the majority owner, Wittington has the power to influence ABF’s management. For example, a simple majority shareholding of more than 50% gives Wittington the power to pass or reject special resolutions at a company general meeting.
Majority ownership isn’t always a bad thing, but it could lead to a situation where the ABF management must act against the minority shareholders’ interests. So, the situation is one to be aware of when considering the stock.
An upbeat trading announcement
Meanwhile, today’s trading update is upbeat. In the 16 weeks to 8 January 2022, constant currency revenue rose by 19% year on year. And the star performance came from Primark with sales 36% ahead of last year thanks to recovery from the pandemic and the reopening of the store estate.
Yet despite the challenges of the coronavirus, ABF pushed ahead with its expansion strategy for Primark. And over the two years since the start of the pandemic, the company opened 25 stores increasing overall selling space by 7%. However, there’s still distance to travel before a full trading recovery is in place. Like-for-like Primark sales remain around 11% below the equivalent period two years ago. But the Omicron variant caused a decline in footfall. Although there has been an improvement “in recent weeks”.
And there’s more good news regarding supply chains. The pressure the company saw in the Autumn of 2021 “has alleviated”. But the directors said the business is still experiencing some delays and the company expects longer shipping times to continue.
Meanwhile, sales in the grocery division rose by 2% year on year. And all the other divisions posted improved sales figures as well.
The outlook is positive. And City analysts expect earnings to advance strongly in the current trading year to September 2022 with a robust single-digit percentage improvement the year after that.
Estimates can, of course, be revised. But based on those assumptions, at a share price near 2,071p, the forward-looking earnings multiple is just below 14. That valuation looks fair to me, and I’m tempted to buy the stock now to hold for the long haul as the recovery and growth story continues to unfold.
