Investment View: Primark still the place to be, if you can stomach it

If you’re the type to trade in and out of stocks I’d book some gains in ABF and look to buy back in
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The Independent Online

Are shares in Associated British Foods starting to get overcooked? That may not be the most appropriate analogy for the company because its spiciest subsidiary has nothing to do with foods or ingredients. It's Primark, whose clothes are never knowingly overpriced. The shares in its parent might be, however.

Let's be fair. There was nothing much wrong with the company's first-half results a few weeks ago. They showed revenue up 10 per cent at £6.3bn and adjusted operating profit, which strips out various accounting quirks and one-offs, up 20 per cent at nearly £500m. Earnings per share grew by just over a fifth, although the dividend was only increased by a disappointing 10 per cent.

The numbers were driven by Primark, where sales were up by nearly a quarter and profit by more than a half. With its relentless colonisation of Britain's high streets and malls continuing, it is now looking overseas, and specifically across the Channel. How will the French react to the company that brought you padded bikinis for children? The format has already been exported to Germany, Austria and the Netherlands. But these European countries aren't renowned for their chic.

Generally, for the rest of the financial year, which ends in mid-September, store openings are expected to slow before picking up again in the 2013/2014 cycle.

Primark might fuel the company's profits (it's got to the stage where it provides around half of them) but there's more to the company than its clothes retailer. It's one of the world's biggest sugar producers, has a substantial agricultural business, and produces a range of well-known food brands such as Jordans, Ryvita and Ovaltine.

Apart from Primark the results were a mixed bag, but there was nothing to frighten investors, although it should be noted that in the second half the sugar business won't be as sweet thanks to lower production in Europe and lower prices in China.

Investors who consider companies' behaviour in taking decisions may not be entirely comfortable with Primark – it was one of the businesses supplied by the Bangladeshi factory that burnt down in April, and while it has signed up to police its suppliers better and offered compensation, it demonstrated that cheap clothes can come at a heavy cost. That said, Primark is hardly the only sinner. Plenty of more supposedly prestigious names source from the same sort of places.

On 20 November I advised that the shares were worthy of holding as an investment, but suggested that readers should consider adding to their holdings if the stock showed any sign of weakness. Well, there was no weakness, and the shares are up by more than a quarter since then. At 1,833p, they are now as pricey as Primark's wares are cheap, sitting on 19 times forecast full-year earnings with a dispiriting 1.6 per cent yield, which is well ahead of the historic average of more like 14 times. The multiple falls to 17.4 times the next year, but it is still looking toppish.

At the risk of missing a trick, now may be a good time to take profits. Long-term, if your conscience can stomach Primark, these are shares to be invested in. However, if you're the type to trade in and out of stocks I'd book some gains and look to buy back in when the stock's multiple is a little less dressy.

Tate & Lyle is another company that I suggested buying if the shares showed any weakness, but like ABF they performed very strongly. At 730p when I last ran the slide rule over them on 20 November, they haven't shown the same sort of spark that ABF has, but there's nothing bitter about a 5 per cent gain to 768p last night. The company trades on a more modest 14 times earnings, yielding 3 per cent, which doesn't look overly frothy.

Tate's not so much about sugar these days (it sold its sugar refineries three years ago) as it is about being a multinational agribusiness. Its produce can be found in a diverse range of foods ranging from toast (soluble corn fibre), to yogurt (starches to provide texture), to jam (fructose sweeteners). Then there's its alternative to sugar, Splenda.

The results, at the end of May, showed sales up 5.4 per cent at £3.3bn and adjusted operating profits up 2.9 per cent at £354m for the year ending 31 March.

In the current financial year, expect the company's speciality foods division to deliver respectable sales and earnings. In "bulk ingredients" sweetener margins in the US should rise helping to offset possibly lower sales volumes.

This is a business which has endured some pain in recent years, but appears to be turning it around. The shares aren't terribly expensive and I don't think its time to sell. Again, if they do start to slip, I say buy. In the long run Tate & Lyle won't set the world alight but there's enough here to suggest that it could help to sweeten your savings, and your retirement.