Why I’m backing the Associated British Foods (ABF) share price to soar!

The Associated British Foods (ABF) share price has slumped this year despite a stellar first-half performance. Here’s why I’m backing the Primark owner.

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Man in a clothing store in a medical mask because of a coronovirus.

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The Associated British Foods (LSE:ABF) share price is down 25% over the past 12 months. The stock slid at the end of April after the company, which owns budget clothing outfit Primark, said inflation will cause prices to rise. However, the trading update wasn’t all bad news as profits surged.

ABF is is a British multinational food processing and retailing company headquartered in London. As its name suggests, low-cost fashion isn’t its only business. Its ingredients division is the world’s second-largest producer of both sugar and baker’s yeast. It owns brands include TwiningsAllinsonsJordansKingsmillPatak’sRyvita, and Silver Spoon.

With the share price down a quarter, I think ABF is looking like a great prospect for the future, and I believe the Primark chain will perform well as Britons rein in their purse strings amid a cost of living crisis.

An attractive valuation

ABF is valued at £13bn and currently has a price-to-earnings P/E ratio of 20.4 based on the previously year’s profits. This doesn’t look particularly attractive, but the firm is expected to return to pre-pandemic levels in 2022. As a result, we could be looking at a forward P/E ratio closer to 10, which looks like a much better proposition to me.

In 2020, the firm made £686m in pre-tax profit and this improved to £725m in 2021. These figures, which are substantially below 2019 and 2018 levels, account for less than half of pre-tax profit achieved in 2017.

However, in April, AB Foods posted adjusted operating profit of £706m for the 24 weeks to March 5, up from £369m a year earlier. Earnings per share are projected to nearly double due to a considerably more favourable operating environment.

Performance and prospects

H1 performance demonstrates that the worst of the pandemic is behind ABF. Improved results were driven by most Primark stores remaining open and trading throughout the period up to March 5. The exceptions included short closures in Austria and The Netherlands where Covid meant strict lockdowns.

Sales at Primark increased 59% to £3.54bn, despite the disruption caused by the Omicron variant around the Christmas period. Sales in the group’s food businesses, which include sugar, grocery, and ingredients, rose 6% to £4.34bn.

Despite the pandemic, ABF has pushed ahead with an aggressive expansion plan that could help propel the Primark business forward. Since the start of the pandemic, the firm has opened 25 stores and increased its overall selling space by 7%. I’m quite bullish on the retailer at the moment as I think a low-cost clothing chain will stand to benefit as shoppers reduce their spend. Thus, I think the expansion may bring benefits in the near term.

However, both sides of the business have noted concerns about inflation. The company is responding by increasing prices, which isn’t good news for consumers. ABF said that the war in Ukraine had led to higher commodity and energy prices. As a result, margins would be reduced across the food businesses.

While inflation is a big worry for ABF, it’s worth noting that other brands, in both foods and fashion, will be experiencing the same pressure. Capacity to retain customers despite price rises will be key.

Should I buy?

I’ve already bought ABF stock and I’m hoping to see some positive movement in the share price soon. I would buy more at the current price. For me, ABF looks very cheap on projected earnings.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

James Fox owns shares in Associated British Foods. 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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