Questor share tip: ABF shares look too expensive

AB Foods
£27.83+112p
Questor says SELL

Conglomerates are dead, long live conglomerates. Associated British Foods [LON:ABF] delivered a strong profit performance despite being the bête noire of most management consultants and business schools in the country.

A company that boasts a combination of sugar, discount clothing and hot drinks seems to be crying out for break-up, but ABF delivered better profits and a higher dividend, sending the shares more than 4pc higher yesterday.

The company reported pre-tax profit up 17.5pc to £1.02bn in the year ended September 14, as another strong performance from clothing retailer Primark offset its struggling sugar business.

Investors saw the annual dividend increased by 6pc to 34p, ex-dividend December 10 and payable on January 9.

Questor was more impressed by the cash generated during the year. Net cash from operations surged to £1.44bn, up £163m on the same period last year. This means that even after spending some £676m opening 25 new stores across Spain, France and the UK, and expanding retail space by 8pc from a year earlier to 10.2m sq ft, the company could easily pay investors £256m in dividends.

In fact, net debt of £446m was £352m lower than the same stage last year. That leaves the balance sheet looking fairly solid, with net debt only 7pc of the £6.44bn in shareholders’ equity.

ABF has been a solid performer for investors, and the only issue here is the reliance on Primark. The discount clothing group contributed 43pc of the group’s operating profit last year. With about 60pc of the store portfolio in the UK, how long can the British consumer carry growth?

The shares, which are trading on 25 times next year’s forecast pre-tax profits of £1.1bn, giving 105p in earnings per share, look far too richly priced given the outlook. Sell.