Overview
Associated British Foods PLC (LSE:ABF, Financial) is a globally diversified business which is active in grocery, retail, sugar, agriculture and ingredients. The company was performing very well in the past, but the pandemic has had a considerable influence over it in the past couple of years.
Associated British Foods' majority shareholder, with 54.6% of total shares outstanding, is Wittington Investments, a privately owned company which in turn is majority owned by the Garfield Weston Foundation. This ownership structure ensures a long-term perspective.
Some of the company's major brands include Jordan's, High 5, RYViTA, Speedibake, Twinings and Mazzetti. The grocer's flagship retail brand is Primark, a fashion retailer which is very popular in the U.K. and Europe and is now expanding in America.
In the last year-end earnings report, Associated British Foods reported the following highlights:
- Primark customers returned to stores in large numbers, strong profit margin recovery reaching 10.6% in second half, wide-reaching new sustainability strategy
- Food businesses delivered adjusted operating profit increase of 10%
- Strong year for AB Sugar
- Assigned ‘A’ grade, stable outlook, credit rating by S&P Global.
Financials
The company has provided the following outlook for 2022:
- Primark − absent imposed store closures, sales and profitability should improve significantly, with full year adjusted operating margin to top 10%; cost inflation and supply chain challenges should be broadly mitigated; confidence in medium-term growth prospects
- Food − working to mitigate significant cost increases, major investment projects underway
- ESG − reopening of Vivergo bioethanol plant
- Significant progress in Group adjusted operating profit and adjusted earnings per share at both half and full year.
Following is a diagrammatic representation of Associated British Foods' balance sheet. It looks healthy, with assets, liabilities and equity nicely balanced. Long term debt is very low, and the company is mostly capitalized by equity.
The company reports bi-annually. Looking at the past six reports, we can clearly see the business recovering from the global pandemic, and this is expected to continue.
Valuation
The GuruFocus Value chart indicates that Associated British Foods is modestly undervalued with a margin of safety of 10% to 20%. I think that is about right. The GF Value is an intrinsic value estimate from GuruFocus that uses the stock's historical price multiples, past returns and estimates of future business performance. Given that the company has a pristine balance sheet, investment risk is very low.
Dividend
Associated British Foods cut its dividend during the beginning of the Covid-19 crisis to preserve cash, but it is expected to raise it back to around 3% over the next couple of years. The company has a history of paying out about 50% of its net income as dividends.
Conclusion
The Yacktman Fund (Trades, Portfolio) had the following to say about Associated British Foods in its third-quarter 2021 letter:
"Though ABF's shares have also lagged this year, we think it still represents exceptional value. ABF is part food, with products like Ovaltine and Twinings Tea; and part retail, with Primark, a leading fashion retailer with approximately 400 stores in 12 countries. While most retail stocks like Macy’s have experienced huge share price recoveries, ABF’s shares have lagged. Perhaps the challenge has been many investors want more of a pure play company, and not a part-food, part-apparel retailer; but over time we think others will recognize the exceptional value the shares represent."
Overall, I am impressed with the company and believe it offers excellent value at present. It has a flawless balance sheet and has well-diversified cash generative businesses. As the recovery proceeds, the company and its shareholders should do very well.
