IT IS 70 years since Associated British Foods was incorporated as a British company that owned seven bakeries. Since then, and under the guidance of the Weston family since 1948, ABF has expanded to become a global food and ingredients group and a member of the FTSE 100. These days, investor focus is less on Kingsmill bread or Twinings tea than on Primark, ABF’s stunningly successful discount fashion chain. Primark still accounts for only just under 20 per cent of ABF group sales and just over 20 per cent of operating profit, but the fashion chain’s ability to outperform its rivals has prompted investors to rate ABF more highly than straightforward food groups.
Nonetheless, it was surprising the ease with which investors yesterday brushed aside news that a fire at a key Primark warehouse had destroyed an estimated £50 million-worth of garments, or three weeks’ supply. ABF’s shares gained 16½p to 804½p, adding £130 million to its market capitalisation.
The market response typifies Primark’s difference. While Marks & Spencer and Bhs are struggling to win over customers, Primark’s like-for-like sales growth this year is about 9 per cent, above the 6 per cent analyst consensus tip. Over the past five years, Primark’s share of the UK clothing market has more than doubled to about 2.7 per cent, still a long way behind M&S’s 9.8 per cent but gaining ground with its strategy of offering customers the latest fashion at low cost.
The overnight fire at Primark’s Lutterworth warehouse in Leicestershire is unlikely to disrupt the sales momentum. Perhaps the fire was a stroke of good fortune; whereas many fashion outlets are struggling to give away their clothes, Primark has just effectively offloaded £50 million of items such as sequin shrugs, white wool coats and boots. Courtesy of its extensive insurance policy, it will be covered not only for the garments’ loss, but also for any fire-related drop in sales should it be unable fully to stack the shelves of its 120-plus stores.
ABF will report full-year results on Tuesday and analysts are more likely to worry about the conversion of recently acquired Littlewood stores and the pending European Union sugar regime than the fire. The consensus forecast is for adjusted profits per share of 52.7p. ABF’s shares are trading on a forecast earnings multiple of 15.3 times. Not cheap, but then ABF is no ordinary company. Keep holding.
BBA Group
AFTER months of deliberations, BBA Group finally confirmed that it had outgrown its nappies yesterday. Or at least Fiberweb, its polypropylene textiles unit that supplies fibres for products such as nappies and shoelaces. Fiberweb has long been a solidly performing business for BBA, increasing annual sales over recent years from about £150 million to £650 million. Yet the unit’s poor fit alongside BBA’s other, bigger core business — aviation services, such as refuelling aircraft — and slower growth prospects prompted the FTSE 250 company to announce an intention to sell Fiberweb, or demerge it. Analysts believe that Fiberweb could be worth up to £700 million in the case of a sale to a trade buyer or private equity bidder. BBA’s market capitalisation before yesterday was £1.41 billion, but it jumped a further £82.5 million as investors rejoiced at the proposed split.
Roy McGlone, BBA’s chief executive, wants the separation to be completed within six months but will not predict a preferred outcome. Bunzl, the outsourcing specialist, forfeited its FTSE 100 membership this year after deciding to spin off Filtrona, the engineering sideline. Merrill Lynch, BBA’s adviser, has started to gather bids for Fiberweb — first-round offers are likely within five weeks — but if McGlone is unhappy with the price, a Bunzl-like spin-off would be on the cards.
In a way, it is more important that Fiberweb will be separated, and not how. BBA’s shares have oscillated in a 275-315p range since January. The soaring oil price has affected Fiberweb’s performance through higher input and energy costs. BBA’s aviation division, on the other hand, has been able to pass on most of the added costs to clients. On its own, McGlone argues, the aviation unit should be able to double in size within five years. It has enjoyed 10 per cent topline growth year on year and is already a leader in a fragmented market.
BBA trades on a lofty 15.7 times forecast earnings multiple, but with a 3.8 per cent dividend yield. There should be confidence that profit growth can be accelerated once Fiberweb is offloaded. Buy.
Highland BUOYANT conditions driven by a soaring gold price have finally rubbed off on Highland Gold Mining, the underperforming miner. A Russian company by birth, the miner was brought to London’s AIM market three years ago, but has failed to deliver on its promise and it has fallen behind in the two-horse race with Peter Hambro Mining to become the biggest AIM-listed gold producer.
Highland’s shares have rallied 54 per cent over the past three months, in part because of the strong gold price but also because of hopes that a management reshuffle and new focus are starting to pay dividends.
Yesterday, the company announced the purchase of several gold exploration licences, which it hopes will add to its suite of producing assets. The deal suggests that management has its existing operations under control and is refocusing on Highland’s growth strategy. The recent share price run is an opportunity for investors to recoup their original investment — but hold on to the rest, if for no other reason than the strong outlook for the wider gold sector.
