Cheap and ready to recover

With a £13.3bn market cap, ABF is valued at 0.95 times last year’s turnover – which was in turn depressed by the pandemic. Given an average price/ sales ratio of 1.26 over the last five years, that’s low.

The price/book ratio – another value measure – stands at just 1.33, against a five-year average of 2.12.

The low valuation is at odds with the very solid trading update. The group expects second-half growth in adjusted operating profit, leading to “significant progress” in adjusted earnings per share (EPS). Analysts’ average EPS estimate for the 12 months to end-September 2022 is 136p, according to Refinitiv’s data. At the current share price of 1,660p, that’s a forward price/ earnings (p/e) ratio of just 12.2. For the following year, analysts forecast EPS of 146p, for a prospective p/e of just 11.3. It’s a far cry from the lofty forecast p/e of 28 on which the shares stood at their 2015 peak.

The balance sheet is robust: net debt including lease liabilities is forecast to be £1.7bn, compared with £10bn of shareholders’ funds. Dividend payments restarted last year at the 40.5p per share level. Analysts expect pay-out hikes to 48p and 52p per share for the 12-month periods to end-September 2022 and 2023. This would put the stock on a decent enough 3.1% yield.

Granted, there are risks. If more Covid-19 cases spur new restrictions – or even just a reluctance among shoppers to go out – Primark’s lack of online sales will once again be a huge disadvantage. Rising inflation will add more uncertainties to an already unclear world economic outlook. And the Russian invasion of Ukraine will hit supplies of key materials, such as wheat, affecting food profit margins. But this out-offavour, quality stock is already good value, while the potential earnings recovery will make it an even cheaper buy.