Shares in Associated British Foods (ABF) cheapened 4.4% to £18.98 on Tuesday as the foods-to-fashion conglomerate reported a statutory first half profits plunge after a £284m inventory write-down at discount fast-fashion chain Primark.
Scrapping its interim dividend in a bid to conserve cash, Associated British Foods also warned the timing of the reopening of Primark stores remained uncertain and the process of reopening, once it begins, ‘is likely to be complex’, meaning it is too early to provide earnings guidance for the rest of the financial year.
STRENGTH THROUGH DIVERSITY
Associated British Foods is feeling the pain from the COVID-19 pandemic, as its budget clothing chain Primark remains shuttered and has no online presence through which to shift stock.
Yet in these testing times, the diversification of the FTSE 100 titan, which also operates sugar, grocery, ingredients and agriculture businesses, is coming to the fore.
All of Primark’s 376 stores have remained closed since 22 March 2020, resulting in lost sales of £650m per month, but the conglomerate’s food businesses have continued to operate fully and have seen a significant increase in demand in recent weeks as consumers hunker down at home.
Encouragingly, results for the half ended 29 February were broadly in line with Shore Capital’s expectations, with adjusted pre-tax profit up 3% at £636m. No interim dividend was proposed, which shouldn’t come as a surprise, with a decision on the full year dividend to be made later.
AMPLE LIQUIDITY
In today’s update, Associated British Foods reported net cash of £801m. Including lease liabilities, its net debt was £2.75bn.
In addition, the company has fully drawn down its £1,088m revolving credit facility and with confirmation of its eligibility to access the UK Government’s Covid Corporate Financing Facility (CCFF), liquidity has been increased further with available cash on hand reported at £1.5bn.
THE ANALYSTS’ VIEW
Despite the uncertainties ahead, Shore Capital sees Primark as ‘an undoubted fixture of apparel retailing in the future when casualties sadly abound around the world’, arguing that ‘the label’s strong value credentials should also stand it in very good stead for what we believe will be tough economic conditions, maybe on a sustained basis too.’
And while there is a lack of earnings visibility for parent Associated British Foods, the broker remains ‘strongly of the view that with a very strong balance sheet and access to significant liquidity then the group and its Primark retail business are well placed to come through the current market challenges in an even stronger relative position than before.
‘We also see the broad-based nature of ABF as a major virtue under current conditions (noting management expectations ex Retail are said to be unchanged), so providing an ongoing source of operating cash flows.’
Liberum Capital concurs, insisting that ‘the strong financial position of the group should enable it to come out of the crisis even stronger, and position it to take further market share as other clothing retail players collapse.’
