ASSOCIATED BRITISH FOODS PLC 
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Like all big conglomerates, its valuation is particularly well suited for the ‘sum of the parts’ method that we’ve also used for Renault, Blackberry and Bravida Holdings.
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Groceries
This first division regroups popular consumer brands in Europe (like Twinings tea, Jordans cereal, etc.), in America (Mazola corn oil, etc.) and in Australia (Don charcuterie, KRC brands, etc.).
The division generates 3,4 billion GBP in revenue and approximately 300 million GBP profit before taxes in 2017. Competitive but growing (7,5% annualized since 2014), we value this division at fifteen times its profit before taxes, at 4,5 billion GBP.
Sugar
Via its British Sugar division, Associated British Foods is the second biggest sugar producer worldwide (4 million tons), just behind the German company Suedzucker (4,2 million tons). Its competitive position in both Europe and Africa is excellent. The activity generates 2,2 billion GBP in revenue and approximately 220 million GBP in profit before taxes in 2017.
This capital intense, cyclical and little profitable activity barely grows. However, the industry is extremely fragmented (British Sugar represents only 1% of the global production) and consolidation opportunities could arise.
We note that the German company Suedzucker (listed on the exchange) has on average been valued at half of its sales for the past ten years. We suggest to keep the same multiple for British Sugar and hence value this division at 1 billion GBP.
Agriculture
This division provides products (protein, seeds, fertilizers, etc.) and services (agribusiness and brokerage, etc.) to professionals in the agro-food sector in 65 countries.
Since 2014, its turnover stagnates at 1,2 billion GBP while its profit before taxes remains unchanged at more or less 50 million GBP. We keep a valuation of ten times this profit or 500 million GBP.
Ingredients
This division provides baked goods in 25 countries and produces all sorts of enzymes, flower extracts and cereal specialties destined for bakers as well as the industry.
Despite a slight growth, this is the consortium's least profitable activity (the return on its own capital is less than 10%). With 1,6 billion GBP in revenue and around 100 million GBP in profit, we value this division at 1 billion GBP (a multiple that equals ten times the profit).
Retail
This division includes all Primark operations and is a true crown jewel. The brand is overwhelmingly popular among its clients thanks to an original business model: zero advertising expenses and a tireless optimization of its commercial spaces indeed allow the company to reverberate significant savings on the selling prices of the clothes, which are extraordinary low.
With ‘only’ 345 stores, the growth potential stays intact and largely unexploited, but Associated British obviously prefers to auto-finance its development and doesn’t want to get into debt – like SuperGroup PLC. We appreciate this prudence and note that when it comes to consolidation Associated British Foods maintains an admirable financial discipline.
The division is far from being the most profitable one of the five divisions of the consortium and has a return on its own capital between 25-30%. It generates 7 billion GBP in revenue (10% of annualized growth since 2014) and around 700 million GBP of profit before taxes.
As long as the growth continues, it makes sense to value Primark at a minimum of twenty times its profit before taxes, or 14 billion GBP.
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The sum of these five valuations is 21 billion GBP. The cash (1,5 billion GBP) covers all the long-term liabilities (1,2 billion GBP) but, out of prudence, we don’t count the excess among the assets.
Reported at a market capitalization of almost 23 billion GBP, we note that the current valuation doesn’t offer a significant discount. So strictly speaking, this article isn’t a stock pick, but it could turn out to be one someday if the share price goes below the 2 500 pence limit – meaning a market capitalization of 20 billion GBP, a ‘fair’ valuation but possibly a good entry point if the growth trajectory of Primark were to be confirmed.
So, we’ll follow this case closely and won’t hesitate to inform our readers of a potential development.
