The third-quarter results from ABF (LSE: ABF) demonstrate one of the advantages of out-of-fashion conglomerates: a natural diversification. Primark, ABF’s retail arm, grew sales by 20%, whilst the older sugar business saw a 20% drop in revenues.
Primark now makes up over half of ABF’s profits and has fuelled the rise in the company’s share price, up 68% in the past 12 months. Its opening stores in continental Europe and this year will increase its total selling space by over 10%.
Primark plans to open in the US in 2015/16. That has dangers. Many UK companies have foundered in the States in the decades since Hanson, the epitome of conglomerates, was a company from over here doing rather well over there. But both Topshop and H&M, which appeal to similar customers as Primark, are successful. And it’s notable that ABF’s cautious family management are opening the first store in Boston, where Irish connections will facilitate brand recognition.
The drag on ABF’s business is sugar. It’s under pressure from intense price competition in the run-up to the abolition of EU quotas in 2017. Longer term, the Western epidemic of obesity is rapidly turning sugar into the new tobacco, with increasing calls for controls on its consumption.
Natural sweetener
One way of sweetening that risk is to also hold shares in Tate & Lyle (LSE: TATE). It saw the writing on the wall and sold its sugar business in 2010, progressively turning itself into a speciality ingredients business. Its products include Sucralose and Stevia, two main alternatives to sugar. The more sugar consumption declines, the better for Tate & Lyle. The two companies fit together so well that the corporate finance fantasist in me imagines ABF taking over the much smaller Tate & Lyle and spinning off retail and food as separate companies.
Tate’s shares haven’t fully recovered from a profit warning in February, as Chinese over-supply of sucralose provoked a price war. That has created an entry point into the long-term story, with the company trading on a PE of 13.
Tate & Lyle pays a useful 4.4% yield, but nobody would hold ABF for its 1.1% payout. But its shares, which have been a four-bagger over the past five years, should have plenty of growth in them yet. However, on a prospective P/E of 29, such growth doesn’t come cheap.