Associated British Foods reveals surprise special dividend

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  • Operating margin down
  • Net debt rises

Associated British Foods’ (ABF) shares hit a 12-month high after the Primark owner’s annual pre-tax profits surged by a quarter, leading it to announce a new £500mn share buyback programme and a special dividend of 12.7p per share.

Primark sales rose by 17 per cent to surpass £9bn, driven by price increases and what management referred to as “good footfall” levels. All divisions posted double-digit top-line growth apart from agriculture, although sales there were still up by a respectable 7 per cent.  

The surprise special dividend took the annual increase in the total payout to a pleasing 37 per cent. Dividends are supported by free cash flow generation – which was £269mn in the period – and undemanding gearing. While net debt rose to almost £2.3bn, the leverage ratio of net debt to cash profits was only one times. 

The adjusted operating margin fell from 8.4 per cent to 7.7 per cent year on year on the back of inflationary pressures, with ingredients the only division to grow its margin. Management forecasts that Primark’s margin, which fell by 160 basis points from last year to 8.2 per cent, will exceed 10 per cent in 2024 as lower material and freight costs flow through and inflation eases further.

Investec analysts said that “while the valuation/earnings growth profile may not be particularly eye-catching, we concede sentiment is more likely to be driven by earnings momentum – which is turning increasingly positive”.

The shares are valued at 13 times forward consensus earnings, according to FactSet, below the five-year average of 15 times. Primark should benefit in 2024 from a 1mn square foot increase in selling space, while the company’s wider earnings profile is improving as underperforming areas of the business (such as Primark Germany and bioethanol plant Vivergo) start to turn a corner. Hold.

Last IC View: Hold, 1,970p, 25 April 2023

ASSOCIATED BRITISH FOODS (ABF)    
ORD PRICE: 2,253p MARKET VALUE: £ 17.2bn
TOUCH: 2,252-2,254p 12-MONTH HIGH: 2,276p LOW: 1,408p
DIVIDEND YIELD: 2.1% PE RATIO: 17
NET ASSET VALUE: 1,450p NET DEBT: 20%
Year to 16 Sep Turnover (£bn) Pre-tax profit (£bn) Earnings per share (p) Dividend per share (p)
2019 15.8 1.17 111 46.4
2020 13.9 0.69 57.6 nil
2021 13.8 0.73 60.5 26.7
2022 17.0 1.08 88.6 43.7
2023 19.8 1.34 134 47.3
% change +16 +25 +51 +8
Ex-div: 14 Dec      
Payment: 12 Jan      
NB: the 2023 dividend per share excludes a special dividend of 12.7p.

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