In April, I wrote an article pointing out the valuation of FTSE 100 growth company Associated British Foods (LSE: ABF) was the lowest I’d seen it in years. The firm has a defensive food business but it also owns fast-growing value fashion and lifestyle retail chain Primark.
Why this FTSE 100 growth company remains on track
The growth achievements and potential of Primark had previously been well accommodated by the market. Indeed, at one point, the earnings multiple was above 30. However, in lockdown, all the Primark stores were closed. And that was a big deal because, in 2019, the Primark business delivered around 60% of the company’s overall operating profit.
Naturally, the share price plunged when the crisis hit trading. And by the time of my April article, the forward-looking P/E rating was just below 14, based on City analysts’ estimates for a rebound in earnings. The stock looked like good value to me back then when the share price stood near 1,888p.
Happily, if you’re in the market for buying quality shares, the price hasn’t risen much since. It currently stands at 2,067p, as I write. And that’s well below the 2,700p or so just before Covid-19 hit the markets. Meanwhile, today’s pre-close-period trading update reveals to us that trading in the fourth quarter of the firm’s financial year has exceeded directors’ expectations.
Both the food and retail (Primark) divisions have been trading well. For example, the grocery sub-division saw increased retail sales volumes in the US, Europe and Australia. And in the ingredients business, higher demand for yeast and bakery products powered sales, particularly in the Americas and China. Meanwhile, the sugar sub-division delivered a “much-improved” profit year on year.
Strong trading
The Primark stores reopened during May, June and July and trading during the fourth quarter was “strong.” I reckon the successful re-opening of the store estate removes one of the major uncertainties surrounding the stock. But not only is Primark surviving, it’s also thriving too. The directors reckon in the latest four-week UK market data for sales in all channels, Primark achieved its “highest ever” value and volume shares for the time of year.
For the full trading year to 12 September, the company expects a “very strong” increase in the total adjusted operating profit for its Sugar, Grocery, Agriculture and Ingredients businesses compared to last year. It seems the pandemic had little effect on that side of the firm’s operations. Meanwhile, adjusted operating profit for Primark is likely to be “at least” at the top end of the £300m-£350m range previously anticipated by the directors. That compares to £913m reported last year.
Primark has taken a hit because of the lockdown and ongoing changes to accommodate the pandemic. But retail operations are recovering strongly and I see the share as attractive as part of a diversified portfolio of quality shares. I’d buy.