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ABF annual results: good growth, some sustainable
Associated British Foods’ 2009 results (the company has a September year end) showed it continued its growth with revenues up 12% and rather smaller rises in profit (adjusted operating profit +8%, adjusted EPS +5%)
It can be seen from the above that revenues have grown and margins have shrunk. There was strong revenue growth in all segments, with margins stable in the sugar business and down significantly in all others.
The good performance of the sugar business depended on a number of one-off factors (a good harvest in the UK, the strength of the Euro, low energy costs) and the strong growth is not sustainable.
The other major source of profit growth was Primark, and that growth appears to be more solid. The 20% sales growth comes from both expansion and like-for-like growth (of 7%). Primark is well positioned to grow despite the continued recession, and even low Christmas spending, given that it is a cheap alternative that will attract customers who are trading down.
Primark now generates 34% of operating profit and has the most sustainable growth. ABF is becoming less and less a food company.
At 825p ABF is not trading on a historical PE of 14×. The high growth in some businesses is diluted by lower growth in others, and not some sources of growth are not sustainable. Primark by it self would command a higher rating, but the group as it is is not quite so attractive.
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