Associated British Foods has become a misnomer. Most of the company’s profits today are generated by its fast-fashion retailer Primark which has, as far as I am aware, very little to do with food.
A conglomerate, but not a dinosaur
This mismatch between core business and company name is due to the company’s structure, which is a throw-back to the days of the diversified conglomerate. If it wasn’t for Primark the company’s name would still be fitting as it has four other key business segments: Sugar, Agriculture, Grocery and Ingredients.
Unlike so many other conglomerates Associated British Foods appears to have mastered the art of multiple plate-spinning. It has done this, to keep the metaphor going, by having one plate spinner per plate and keeping the plates and their plate spinners a safe distance apart.
The result been steady growth for many years, but steady growth for the group has hidden widely differing fortunes for underlying businesses.
Agriculture, Groceries and Retail drive the company forward
The Sugar and Ingredients businesses have failed to grow their profits in the last decade while the Agriculture, Groceries and Retail segments (where Retail = Primark) have done exceedingly well. So well in fact that in 2015 they produced around 90% of the company’s total adjusted operating profit, rendering the Sugar and Ingredients businesses almost irrelevant from a valuation point of view.
Together the three successful businesses have growth their combined adjusted operating profits from £371 million in 2007 to £1,018 million today, which is an annualised rate of growth of 13%. This is impressive, but Primark has done even better. In 2007 Primark’s adjusted operating profits stood at £200 million; over the following 8 years those profits have tripled, growing at a compound rate of 16% to £673 million.
This positive track record has been built without a heavy dependence on borrowed money or acquired businesses. All told, this is exactly the sort of company I like to invest it, even if it is primarily a retailer rather than a food producer.
Success is baked into the share price pie
Primark is now likely to dominate the company’s future cash flows. That’s important because those future cash flows, discounted at an appropriate rate, represent the underlying or intrinsic value of the company and – as a value investor – I am only interested in buying companies where the market value is sufficiently far below the intrinsic value.
Associated British Food’s share…
