The FTSE 100 has several retail stocks. But it’s set to get a new one that could be very interesting for investors.
Associated British Foods (LSE:ABF) is set to demerge Primark. And I think this is worth a closer look.
What’s the opportunity?
Is another retailer joining the FTSE 100 really an opportunity? To see why it might be, here’s Luke Bridgeman – a portfolio manager at Hosking Partners – on the Business Breakdowns podcast:
“Because retail is a negative working capital business, these companies don’t require so much outside capital in order to grow and to develop. And that means that as public shareholders, we’re often denied the opportunity to get exposure to them. If you look at the great supermarkets, often they’re family businesses which only come to the stock market once they’ve gone ex-growth and they’re mature, and the equity market is simply an exit for them rather than a source of capital.
“So we keep our eyes open for other growth retailers which we can get hold of. And often they are in a wrapper [in other words, owned by another company] such as3i. Another example would be the pan-European fashion retailer called Primark, which is part of a much larger conglomerate called Associated British Foods. So it’s really exciting having the opportunity to get exposure to such a fast-growing retailer.â€
The chance to buy shares in a retail business isn’t particularly unusual. But Primark is different.
Fast fashion
Primark’s biggest opportunity is in the US. That’s often something to view with caution — it can be a tough market.
The business, however, is off to a decent start. It currently has 33 stores, but plans to expand this to at least 60.
Primark focuses on customer value, which I expect to be popular over the long term. But this only works for operators with low costs.
The main way the company does this is by focusing on its stores. It doesn’t offer home delivery, which reduces returns and logistics costs.
It also manages its SKUs carefully, has stores with functional layouts, and keeps marketing costs down. All of that helps keep prices down.
Recent weakness
Despite these strengths, Primark’s recent results haven’t been that strong. In the latest update, total sales growth came in at 2%.
Beneath the surface, things look even worse. New stores generated 4% growth, meaning the existing ones went backwards.
ABF attributed this to weak consumer spending and unusual weather. It also highlighted the conflict in Iran.
All of that makes sense. But the time to spin off a business isn’t usually when you’re having to point out the ongoing risks.
To my mind though, that looks like the opportunity. And analysts are forecasting that the company could be worth £10bn.
Buy now or wait?
A £10bn valuation implies a price-to-earnings (P/E) multiple of around 11. That’s roughly in line with other UK retailers.
The thing is, I don’t think Primark is the same as other UK retailers. It looks to me as though it has much better prospects.
The main detail I’m still waiting for is debt. ABF has around £3bn in net debt, but how much will Primark take?
Once that becomes clear, I’ll looks again. But for now I’ll keep this on the radar as a potential opportunity.
The post How is Primark coming to the FTSE 100 an exciting opportunity for investors? appeared first on The Motley Fool UK.
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Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has recommended Associated British Foods Plc. 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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