Here’s why the Associated British Foods (ABF) share price surged today
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The share price of Associated British Foods (LSE:ABF) jumped more than 5% today after the company released its full-fiscal-year results. The jump has helped reverse some of the adverse performance seen throughout 2021. And the 12-month return is almost back in the black. But can it continue to climb higher? Let’s take a closer look at what the business has been up to and whether I should be considering it for my portfolio.
Decent earnings in a tough year
As the name suggests, Associated British Foods is a food specialist operating on an international scale. Its portfolio contains brands like Kingsmill bread, Patak’s and Blue Dragon cooking sauces, as well as Twinings, among others. But the firm isn’t restricted to just the grocery space, as it also serves the sugar, agricultural and ingredient industries. And on top of that, it owns and operates the fast-fashion retailer Primark. Needless to say, this is a pretty diversified business.
Looking at the latest results, it’s easy to understand why the ABF share price rose today. On the food-related side of the group, revenue over the last 12 months jumped by a respectable 5% while operating profits climbed 10%, reaching £760m. Meanwhile, Primark managed to deliver an impressive 15% growth in underlying earnings when ignoring the effects of 2020 furlough scheme repayments. Although revenue did suffer due to supply chain disruptions.
Overall revenue for the past year came in flat, as did earnings. But with dividends now reinstated along with net debt falling by just over £700m, the firm looks like it’s primed to make a recovery.
Risks continue to surround the ABF share price
As encouraging as this report is, there remain plenty of hurdles to overcome. The pandemic may be a short-term problem, but it’s wreaking havoc in some parts of the business. Most notably, Primark.
Stores reopened earlier this year, and the company has managed to start moving unsold inventory. But Covid-19 is creating substantial congestion at harbours and ports that, in turn, has led to a sea container shortage. Consequently, management warned that some of Primark’s product lines will have limited availability for the foreseeable future. That’s not exactly encouraging since Christmas is just around the corner.
Meanwhile, the cost of producing its food and ingredient-related products is rising due to inflationary pressure.s The company intends to raise prices to try and maintain profit margins, but this may result in reduced sales volumes as businesses and consumers look to find cheaper alternatives.
The bottom line
All things considered, Associated British Foods looks like it’s in a much stronger position than a year ago. The residual effects of the pandemic will continue to plague operations for a while, in my opinion. However, I’m pretty optimistic about the firm’s recovery strategy. And over the long term, I think the ABF share price can return to its former glory. Therefore, I am considering this business for my income portfolio.
Zaven Boyrazian has no position in any of the shares 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.