I last wrote about FTSE 100 growth and income star Associated British Foods (LSE: ABF) in October 2015.
The company owns a food-focused business with defensive characteristics. But it’s also home to the fast-growing value retail fashion/lifestyle chain Primark, which last year delivered around 60% of overall operating profit. As such, the set-up is unusual. The firm also has great investment appeal for me.
A highly-rated FTSE 100 share
When I looked almost five years ago, the P/E rating was around 32. My conclusion: “At this level, I’m not interested, because a lot of future growth seems already priced-in to the shares.” And ever since, the share has been trading essentially sideways.
Then coronavirus hit. And everything has changed. Naturally, the crisis has thumped operations hard, and the company has closed all its Primark stores. In that side of the business, the company isn’t experiencing a mere cash flow crisis, it’s suffering a no-revenue crisis. However, the food operation has carried on trading.
Meanwhile, after the stock’s recent plunge, the valuation looks lower than it has done for years. I sense an opportunity. City analysts have pencilled in an earnings decline close to 25% for the current trading year to September. But they also expect earnings to resurge during 2021 by as much as around 36%.
With the share price close to 1,888p, as I write, the forward-looking price-to-earnings rating for next year is around 13.5. That’s a vast improvement compared to the high multiples of five years ago. But it’s not the only indicator to like. ABF went into this crisis with a net cash position on the balance sheet.
In today’s half-year results report, the company revealed the net cash balance before lease liabilities on 29 February was £801m. However, if you include lease liabilities of £3,552m, net debt at the end of the half-year was £2,751m.
A reasonably positive outlook
The trading figures in the report are good, with both the food and the retail divisions performing well. I won’t bore you with the numbers because things have changed so much going forward. But, in summary, the food division continues to trade well and Retail (Primark) is waiting for an end to social-distancing restrictions.
Chief executive George Weston offers a detailed explanation about the measures the company has been taking to mitigate the crisis. Indeed, the report is worth a read because it’s perhaps the best account I’ve seen from any company so far.
Naturally, the half-year dividend is toast. But I applaud the management team for slashing their own pay too. The executive directors have cut their base pay by 50% and rejected all bonuses relating to the current financial year. On top of that, the non-executive directors have taken a 25% haircut.
Looking ahead, the directors expect Sugar, Grocery, Ingredients and Agriculture (the food business) to perform well. And the company has slashed operating costs for Primark by half. However, the timing of the reopening of the stores “remains uncertain” and they expect the process of reopening to be “complex.”
Meanwhile, I’m seeing directors displaying integrity and managing the operation well. I reckon the current valuation is an opportunity for me to buy and hold for the long term.