FTSE 100 conglomerate Associated British Foods (LSE: ABF) has come a long way since last year. Its share price has regained much of the ground lost in 2020. And I think there are at least three reasons that it can continue to rise further. Here they are…
#1. Reopening of Primark
Fast-fashion retailer Primark is a money-spinner for the company. But the retailer doesn’t sell online. So, it was obvious that the company would be hurt by store closures during lockdowns.
That is soon to be a thing of the past, though. The company expects that by April 26, 83% of its retail spaces should be open for trading. While it does estimate to have lost £1.1bn for the time that the stores were closed, I think it bodes well that when they did open, footfall was relatively strong.
#2. More than sugar
While its losses were piling up in retail, Associated British Foods was stacking up gains in sugar. With the commodity bull run under way last year, sugar prices rose as well. As a result, the company expected revenue to be marginally ahead of the year before and operating profit to be significantly ahead in its previous trading update.
Importantly, I think it is interesting that this is actually a minor cannabis stock as well. British Sugar also grows weed, which it sells to GW Pharmaceuticals, that uses cannabis for medical treatments for conditions like epilepsy. As medical marijuana grows from its current nascent stage, I reckon this aspect of ABF’s business can expand.
#3. Grocery, agriculture and ingredients strong too
Besides British Sugar, the FTSE 100 conglomerate’s grocery, agriculture and ingredients divisions showed growth too. Accounting for almost half of total revenue last year along with sugar, growth across these segments helped when retail dragged down overall revenue for ABF. And it expects growth to continue.
But there is a downside
The one concern I have about the FTSE 100 stock is the pace of recovery. The company has already lost ground, in terms of revenue, with the closure of its retail stores. The lockdown in the UK, which is where the largest number of Primark stores are, will well and truly end only at the end of June.
It is only then that we will know how the post-lockdown economy is faring. Are consumers likely to be conservative, coming from a time of uncertainty, or are they likely to be profligate because of pent-up demand? I guess we will know soon.
The takeaway for the reopening stock
I am optimistic about the outcomes for Primark, though, considering that it targets budget shoppers and going by its performance when shops were open between lockdowns. I think this FTSE 100 reopening stock can see better times ahead. It is a buy for me.
