Yesterday saw the release of interim full-year results for Associated British Foods (LSE:ABF). The results ran through to the middle of September, so encompass a good chunk of the pandemic from late 2020 onwards. It’s therefore a good barometer for investors to use when deciding whether to invest. The ABF share price broke above 2,000p, up 7.7% on the day, signalling investor positivity. So should I join the party?
Results were positive overall
Let’s take a detailed look at the results first. Statutory operating profit came in at £808m, which was broadly the same as the £810m from the previous year. However, on an adjusted basis, profit was up 10%.
Key areas of growth were as follows. The report stated that “sugar delivered another year of very strong improvement with profit margin reaching 9.2% and a 75% increase in adjusted operating profit at constant currency”. It also noted the strong performance in the grocery division.
In terms of drags, it was mostly down to Primark. ABF estimates the lost revenue to be £2bn in the past year due to store closures. Given the operating model (no website sales), the closure of physical stores was a major blow to the business.
But ABF doesn’t expect the hit to continue. The annual report said “we expect Primark to increase sales significantly along with a sharp improvement in adjusted operating margin”.
Further possible gains for the ABF share price
I think that the report as a whole was positive, with the rally in the share price telling me I’m not alone in this regard. After all, if the brands within the grocery and ingredients divisions maintaining their performance and we see Primark sales increasing, next year should see revenue significantly higher.
The other point I like is that ABF is a well diversified company. The product offering range from Dorset Cereals through to Twinings tea. So from year to year, even if one area underperforms, the rest of the business can cover for it. In fact, this is exactly what we’ve seen in the latest report with Primark.
Therefore, I think this reduces my risk from investing in ABF shares. Unless we see some kind of event where demand for a multitude of brands and categories slumps, I think revenue should always be supported.
One risk that I do think is valid is supply chain disruption. Although operating in many different areas, ABF’s brands are all physical products requiring distribution to sites. Therefore, issues with haulage, ports or other transport links could be a serious problem.
Over one year, the share price is up 11% and I think it could move well above 2,000p heading into next year. However, there’s still room to run higher before reaching the levels around 2,500p seen back in early 2020. Therefore, I’m considering buying some shares now.
jonathansmith1 has no position in any share mentioned. The Motley Fool UK has recommended Associated British Foods. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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