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TRANSCRIPT
Deutsche Bank Markets Research
Rating
Buy Europe
United Kingdom
Consumer Staples
Food Manufacturing
Company
A B Foods
Date
29 July 2016
Special Report
An introductory guide
Reuters Bloomberg Exchange Ticker ABF.L ABF LN LSE ABF
ADR Ticker ISIN ASBFY US0455194029
An introduction to ABF: from field to fork and from teabags to t-shirts
________________________________________________________________________________________________________________
Deutsche Bank AG/London
Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 057/04/2016.
Price at 28 Jul 2016 (GBP) 2,686.00
Price Target (GBP) 3,200.00
52-week range (GBP) 3,599.00 - 2,350.00
Warwick Okines
Research Analyst
(+44) 20 754-58546
Jaina Mistry
Research Associate
(+44) 20 754-71337
Charlie Muir-Sands, CFA
Research Analyst
(+44) 20 754-75749
This report is intended for readers looking for an introduction to AB Foods and its five divisions. We would direct those familiar with the company to our report "Not just about Primark", also published today, for a discussion of our view of the stock.
A diverse conglomerate: around the world in 80 years AB Foods (ABF) is listed in the Food Producers & Processors sector and is the 26th largest company in the FTSE100 by market capitalisation. It is majority owned by the Weston family and CEO George Weston is a grandson of the founder. It operates five divisions: Grocery, Sugar, Agriculture, Ingredients and Retail. Its largest brand by both sales and profits is Primark, a value fashion retailer operating predominantly in Europe. In addition ABF owns consumer food brands such as Twinings, Ovaltine, Ryvita and Kingsmill; it is a manufacturer of sugar on three continents; and develops and manufactures a wide range of ingredients and agricultural feeds. This report describes the history, operations and drivers of the group.
10 things you may not know about AB Foods Whilst this Introductory Guide is aimed at those new to ABF, we see value for more seasoned readers. Ten things we would highlight as being of interest are:
ABF’s ultimate controlling party is a charitable trust;
In 2015 51% of profits were generated outside the UK, the highest proportion since the global financial crisis;
Capital expenditure excluding spend on Primark has declined since 2011;
When Penneys entered the UK in 1973, it used the Primark brand because Penneys was registered to JC Penney;
Primark sells more units than Inditex each year but has one third of its revenues;
Primark’s average selling price is less than half of H&M’s and it makes less than half of the profit from selling 100 items than H&M;
Grocery has the second highest divisional ROCE, after Retail, reaching its record adj. operating profit margin of 9.0% in 2015;
Sugar fell from 46% to 4% of group adj. EBIT between 2012 and 2015. As well as sugar the division grows tomatoes and produces electricity;
The Agriculture division is small but has a 10 year adj. operating profit CAGR of over 10%, second only to Retail;
The Ingredients business develops enzymes that are not only used in food production but also in textiles, detergents and converting waste to biofuels.
Distributed on: 07/29/2016 18:04:03GMT
29 July 2016
Consumer Staples
A B Foods
Page 2 Deutsche Bank AG/London
Model updated:29 July 2016
Running the numbers
Europe
United Kingdom
Food Manufacturing
A B Foods Reuters: ABF.L Bloomberg: ABF LN
Buy Price (28 Jul 16) GBP 2,686.00
Target Price GBP 3,200.00
52 Week range GBP 2,350.00 - 3,599.00
Market Cap (m) GBPm 21,219
USDm 27,839
Company Profile
Associated British Foods PLC is listed in the Food Producers & Processors sector. It operates 5 divisions: Grocery, Sugar, Agriculture, Ingredients and Retail. Its largest brand is Primark, a value fashion retailer operating mainly in Europe. ABF also owns consumer food brands such as Twinings, Ovaltine, Ryvita and Kingsmill; it is a manufacturer of sugar on three continents; and develops and manufactures a wide range of ingredients and agricultural feeds.
Price Performance
12001600200024002800320036004000
Jul 13 Jan 14 Jul 14 Jan 15 Jul 15 Jan 16
A B Foods FTSE 100 INDEX (Rebased)
Margin Trends
6
8
9
11
12
14
13 14 15 16E 17E 18E
EBITDA Margin EBIT Margin
Growth & Profitability
02468101214
-5
0
5
10
15
13 14 15 16E 17E 18E
Sales growth (LHS) ROE (RHS)
Solvency
0
50
100
150
200
250
-10
-5
0
5
10
15
13 14 15 16E 17E 18E
Net debt/equity (LHS) Net interest cover (RHS)
Warwick Okines
+44 20 754-58546 [email protected]
Fiscal year end 14-Sep 2013 2014 2015 2016E 2017E 2018E
Financial Summary
DB EPS (GBP) 98.09 104.08 102.05 102.78 119.92 131.02
Reported EPS (GBP) 74.05 96.46 67.34 100.55 118.49 129.77
DPS (GBP) 32.35 34.00 35.00 36.55 42.03 46.24
BVPS (GBP) 779.1 814.8 802.0 868.4 939.8 1,018.3
Weighted average shares (m) 790 790 790 790 790 790
Average market cap (GBPm) 13,479 20,947 23,590 21,219 21,219 21,219
Enterprise value (GBPm) 14,429 21,497 23,787 21,394 21,016 20,491
Valuation Metrics P/E (DB) (x) 17.4 25.5 29.3 26.1 22.4 20.5
P/E (Reported) (x) 23.0 27.5 44.3 26.7 22.7 20.7
P/BV (x) 2.32 3.22 3.80 3.09 2.86 2.64
FCF Yield (%) 4.2 3.2 2.5 2.4 3.3 4.2
Dividend Yield (%) 1.9 1.3 1.2 1.4 1.6 1.7
EV/Sales (x) 1.1 1.7 1.9 1.6 1.4 1.3
EV/EBITDA (x) 8.9 13.6 16.6 13.6 11.9 10.9
EV/EBIT (x) 13.3 19.9 25.1 19.6 16.9 15.3
Income Statement (GBPm)
Sales revenue 13,315 12,943 12,800 12,997 14,522 15,184
Gross profit 3,220 3,150 3,029 3,076 3,437 3,593
EBITDA 1,623 1,576 1,429 1,568 1,766 1,886
Depreciation 405 402 401 421 470 492
Amortisation 130 94 81 55 54 52
EBIT 1,088 1,080 947 1,092 1,242 1,342
Net interest income(expense) -87 -58 -53 -40 -21 -6
Associates/affiliates 0 0 0 0 0 0
Exceptionals/extraordinaries -128 -2 -172 0 0 0
Other pre-tax income/(expense) -5 0 -5 -5 0 0
Profit before tax 868 1,020 717 1,047 1,221 1,336
Income tax expense 240 237 193 246 285 312
Minorities 43 21 -8 6 -1 -1
Other post-tax income/(expense) 0 0 0 0 0 0
Net profit 585 762 532 794 936 1,025
DB adjustments (including dilution) 190 60 274 18 11 10
DB Net profit 775 822 806 812 947 1,035
Cash Flow (GBPm)
Cash flow from operations 1,169 1,369 1,143 1,183 1,306 1,497
Net Capex -601 -691 -542 -675 -595 -607
Free cash flow 568 678 601 508 711 890
Equity raised/(bought back) -22 34 -34 0 0 0
Dividends paid -232 -256 -271 -289 -332 -365
Net inc/(dec) in borrowings 0 0 0 0 0 0
Other investing/financing cash flows -57 -98 -44 50 0 0
Net cash flow 257 358 252 269 379 525
Change in working capital -97 100 -66 -53 -110 -27
Balance Sheet (GBPm)
Cash and other liquid assets 362 519 702 726 1,104 1,629
Tangible fixed assets 4,552 4,665 4,488 4,996 5,126 5,246
Goodwill/intangible assets 1,581 1,467 1,367 1,338 1,310 1,284
Associates/investments 218 212 212 212 212 212
Other assets 3,661 3,609 3,503 3,531 3,775 3,871
Total assets 10,374 10,472 10,272 10,803 11,528 12,243
Interest bearing debt 1,166 965 896 896 896 896
Other liabilities 2,689 2,754 2,825 2,829 2,990 3,086
Total liabilities 3,855 3,719 3,721 3,725 3,886 3,982
Shareholders' equity 6,155 6,437 6,336 6,861 7,425 8,045
Minorities 364 316 215 217 217 216
Total shareholders' equity 6,519 6,753 6,551 7,077 7,641 8,261
Net debt 804 446 194 170 -208 -733
Key Company Metrics
Sales growth (%) 8.7 -2.8 -1.1 1.5 11.7 4.6
DB EPS growth (%) 12.5 6.1 -2.0 0.7 16.7 9.3
EBITDA Margin (%) 12.2 12.2 11.2 12.1 12.2 12.4
EBIT Margin (%) 8.2 8.3 7.4 8.4 8.5 8.8
Payout ratio (%) 43.7 35.2 52.0 36.4 35.5 35.6
ROE (%) 9.7 12.1 8.3 12.0 13.1 13.3
Capex/sales (%) 4.6 5.5 4.8 5.2 4.1 4.0
Capex/depreciation (x) 1.2 1.4 1.3 1.4 1.1 1.1
Net debt/equity (%) 12.3 6.6 3.0 2.4 -2.7 -8.9
Net interest cover (x) 12.5 18.6 17.9 27.5 59.0 221.9
Source: Company data, Deutsche Bank estimates
29 July 2016
Consumer Staples
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Deutsche Bank AG/London Page 3
Table Of Contents
A brief history ...................................................................... 4 Diversification, acquisition and expansion .......................................................... 4
A summary: the ABC of ABF ............................................... 6 The group today ................................................................................................. 6 Management team ............................................................................................. 7 Shareholder structure ......................................................................................... 7 Financial summary ............................................................................................. 8 Share price performance .................................................................................. 12 Strategy ............................................................................................................ 12 Balance sheet ................................................................................................... 13
Grocery .............................................................................. 17 Grocery division in the group context ............................................................... 17 Description of ABF’s Grocery division .............................................................. 17 Track record and performance ......................................................................... 18 Market share and competitive landscape ......................................................... 19 Strategy and the future ..................................................................................... 23
Sugar ................................................................................. 24 Sugar division in the group context .................................................................. 24 An introduction to the sugar industry ............................................................... 24 Description of ABF’s Sugar division ................................................................. 28 Track record and performance ......................................................................... 32 Market share and competitive landscape ......................................................... 33 Strategy and the future ..................................................................................... 33
Agriculture ......................................................................... 34 Agriculture division in the group context .......................................................... 34 An introduction to the animal feeds industry.................................................... 34 Description of ABF’s Agriculture division ......................................................... 34 Track record and performance ......................................................................... 35 Market share and competitive landscape ......................................................... 36 Strategy and the future ..................................................................................... 36
Ingredients ......................................................................... 37 Ingredients division in the group context ......................................................... 37 An introduction to the ingredients industry ...................................................... 37 Description of ABF’s Ingredients division ......................................................... 38 Track record and performance ......................................................................... 39 Market share and competitive landscape ......................................................... 39 Strategy and the future ..................................................................................... 39
Retail .................................................................................. 40 Retail division in the group context .................................................................. 40 Description of ABF’s Retail division .................................................................. 40 Track record and performance ......................................................................... 48 Market share and competitive landscape ......................................................... 54 Strategy and the future ..................................................................................... 57
29 July 2016
Consumer Staples
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Page 4 Deutsche Bank AG/London
A brief history Diversification, acquisition and expansion
Rising from bakery
With its founding roots in a chain of bakeries in Toronto opened by George
Weston in the late 1800s, AB Foods (ABF) has turned into an international
conglomerate with diverse operations. This section highlights some key
moments in ABF’s history, from processing ingredients and groceries to selling
apparel and developing enzyme technologies.
Allied Bakeries Ltd was incorporated in 1935 by W. Garfield Weston, president
of George Weston Limited that his father had founded in Canada. Allied
Bakeries was a group of biscuit and bread factories in the UK and it expanded
rapidly. It rebranded to Associated British Foods (ABF) in 1960 and acquired
Twinings in 1964. In 1969 the group opened its first clothing store under the
Penneys brand in Mary Street, Dublin. By the 1970s, ABF’s strengths lay in
bakery, milling and its grocery business but its operations also included
activities in seed technology, restaurants and catering. Since then, we can
divide the modern history of the group into three periods.
Period 1 – 1980s and 1990s: Diversification
The 1980s and 1990s marked the first key period in ABF’s modern history:
decades of diversification that shaped how the company looks today. In this
time, ABF formed its ingredients business and acquired its sugar and
agricultural businesses. Penneys, which had entered the UK in 1973 using the
brand Primark since Penneys was registered to JC Penney, continued to grow.
In 1992 it opened a 50,000 sq ft major flagship on O’Connell Street, Dublin.
Period 2 – 1999-2005: Acquisitions which define the group
As a result of weak trading in the late 1990s, ABF exited its food retailing
business in 1997 and focused on strengthening its core businesses through a
series of acquisitions. ABF acquired almost 20 companies between 1999-2005.
These included Ovaltine, which would later be merged with Twinings and
together are the bulk of today’s Grocery division. Primark developed through
acquiring parcels of stores. In 1999 it acquired 11 stores from the Co-Op and in
2000 it acquired 11 stores from C&A which exited the UK market. 2005 was a
seminal year in the development of Primark. During the year it acquired 6 UK
stores from department store chain Allders, allowing it to open a major 70,000
sq ft flagship on Oxford Street, London. This better enabled the brand to begin
to express a stronger fashion image. In July 2005 ABF acquired Littlewoods
stores (120 stores in total, of which 41 stores became Primark). This would
propel the growth and development of Primark, which became the largest
profit by division in FY Sep-06.
Period 3 – 2006-2015: The age of Primark
Having evolved into a large-sized store format and developed its fashion
credentials in the UK & Ireland, Primark then embarked upon continental
European expansion in 2006 by opening in Spain. A smooth management
transition in 2009 took place when Arthur Ryan, who had founded the
business 40 years previously, was succeeded as Primark CEO by Paul
Marchant, who had been recruited from UK value fashion competitor New
Look. By 2014 the brand was ready to announce its entry into the US, and it
opened its doors the following year. By FY Sep-14 Primark had become the
majority of group profits and arguably the main driver of ABF’s share price.
29 July 2016
Consumer Staples
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Deutsche Bank AG/London Page 5
Figure 1: Key events in ABF’s history
1935 Allied Bakeries founded by W. Garfield Weston
1960 The company is renamed Associated British Foods
1964 Twinings acquired
1969 First apparel store, named 'Penneys', is opened in Dublin in June under the leadership of Arthur Ryan
1971 Food retail business, Fine Fares, opens its first superstores
1973 Primark opens its first store in the UK
1982 ABF lists on the stock exchange
1986 Fine Fares sold to what became Somerfield
1988 George Weston, grandson of the founder, joins the company as manager of flour-milling operations in Australia
1991 British Sugar (including AB Agri) acquired
1995 ABF acquires Kraft’s food ingredients business, first named AC HUMKO and later ACH
1997 Exit of food retail through sale of Irish supermarkets to Tesco
1999 Garry Weston, son of W. Garfield, retires, having run the company since 1967. Peter Jackson becomes CEO.
Garry’s son George is appointed to the board and John Bason appointed as Finance Director
2002
2004
Ovaltine acquired for £171m
AB Mauri (ingredients business) is formed from a number of acquisitions of bakery ingredients businesses
2005 Allders & Littlewoods stores are acquired in the UK
George Weston succeeds Peter Jackson as CEO in April
Fire in Primark distribution centre in Magna Park, Lutterworth
2006 Primark's first store in continental Europe opens in Spain
AB Sugar acquires a 51% stake in Illovo for £317m
2007 Aquires Patak’s and takes 20% stake in Jordans for a combined c.£150m
Vivergo Fuels formed as a joint venture between ABF, BP and DuPont
2008 ABF’s Jordans and Ryvita businesses merge to form Jordans & Ryvita, 62% owned by ABF
Primark enters the Netherlands
AB World Foods is formed
2009 Arthur Ryan becomes Chairman of Primark as Paul Marchant joins from New Look to become CEO
Primark enters Portugal and Germany
AB Sugar acquires Azucarera (Iberian sugar business)
2010 Primark enters Belgium
2012 Primark enters Austria
Agriculture: AB Connect is formed (UK feed business) and AB Vista launches the Quantum blue enzyme
Vivergo begins production of bioethanol in Hull (UK)
2013 Primark enters France
Primark runs 12 week trial of online sales with Asos, subsequently discontinued
Collapse of a factory in Bangladesh used by Primark (as well as H&M, Inditex and numerous other brands) sparks controversy about workers' conditions
Jordans & Ryvita now fully owned by ABF
2014 In April Primark announces its intention to launch in the US
2015
Primark enters the US with opening in Boston
AB Sugar closes 2 factories in Heilongjiang Province, Northern China
2016 Primark opens its first store in Italy
Acquisition of Illovo minority stake for £245m
Source: Deutsche Bank, company data
29 July 2016
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Page 6 Deutsche Bank AG/London
A summary: the ABC of ABF
The group today
5 business segments, with operations throughout the supply chain
ABF has 5 separate business segments. These are briefly summarised as:
Grocery: owns and manufactures food brands, ranging from hot
beverages (e.g. Twinings) to world foods (e.g. Patak’s).
Sugar: grows, processes and sells beet and cane sugar, predominantly
for use in industry. It also produces co-products, for example
generating power for its own operations, and in some markets
exporting its surplus.
Agriculture: focuses on manufacturing animal feed and developing
new technologies for animal nutrition.
Ingredients: primarily manufactures yeast and bakery ingredients, but
also has operations in the pharmaceuticals, chemicals and other
industries.
Retail: value fashion retailing in all major European markets and in the
US through its Primark brand (named Penneys in Ireland but in this
report we use Retail and Primark interchangeably).
Figure 2: A breakdown of ABF’s businesses and brands
Business Breakdown Brands/Description
Grocery AB World Foods Blue Dragon, Patak's, Levi Roots, Tabasco, Meena's
Allied Bakeries Kingsmill, Allison, Burgen, Sunblest
George Weston foods Tip Top, Golden, Burgen, Watsonia, Mauri anz, Don, KR Castlemaine, Jasol, Abbott’s Village Bakery
Speedibake Produces bakery products
Twinings Ovaltine Twinings, Ovaltine
Westmill foods Asli, Pride, Lea & Perrins, HP sauce, Stokelys, Rajah, Tolly Boy, Lucky Boat noodles, Levi Roots, Jimmy's, Green Dragon, Guru, Habib, Elephant Atta, Daawat, Asli Atta, Amoy, Patak's
ACH Mazola, Capullo, Spice Islands, Durkee, Weber seasoning, Tone's, French's, Patak's, Karo, Argo, Kingsford, Fleischmann's, Henri's
Allied Mills Produces flour and semolina
Jordans, Dorset & Ryvita Jordans, Dorset Cereals, Ryvita
Silver spoon company
Strata
Sells sugar
Sells bottled oil products
Sugar AB Sugar China, British Sugar, Azucarera, Illovo, Vivergo, Germains (seed technology)
Agriculture AB Agri AB Vista, AB Connect, Speciality Nutrition, AB Sustain, AB Agri China, Frontier Agriculture
Ingredients AB Enzymes Enzymes for baking, food, animal feed, textile, pulp and paper
Ohly Yeast extracts, yeast based flavours and speciality powders
SPI Pharma Supplies pharmaceutical industry
AB Mauri Yeast and bakery ingredients
ABITEC Corporation Ingredients for toll manufacturing, pharmaceutical industry, nutritional sciences, speciality chemicals, personal care and cosmetics
PGP international Supplies and manufactures cereal food ingredients
Retail Primark & Penneys Clothing, footwear, accessories and homewares retailer
Source: Company data, Deutsche Bank
29 July 2016
Consumer Staples
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Deutsche Bank AG/London Page 7
Management team
Charles Sinclair: Non-executive Chairman
Charles Sinclair was appointed Chairman of ABF in April 2009. He joined ABF
in 2008 from Daily Mail and General Trust plc, where he was CEO for over 20
years. He previously was a director at Reuters, Schroders and Euromoney
Institutional Investor.
There are two executive directors:
George Weston: CEO
George Weston, a grandson of the company’s founder W. Garfield Weston,
became CEO in 2005. He succeeded Peter Jackson, the company’s only CEO
outside of the Weston family. Mr Weston was previously Managing Director of
George Weston Foods, Westmill Foods and Allied Bakeries at ABF. He is a
non-executive director of Wittington Investments Limited and a trustee of the
Garfield Weston Foundation.
John Bason: Finance director
John Bason was appointed as finance director in May 1999. He was previously
finance director at Bunzl Plc. He is currently a non-executive director at
Compass Group plc.
Shareholder structure
55% is family owned...
ABF has one class of share and the Weston family holds a 54.5% controlling
stake through the company Wittington Investments Ltd (50.9%) and its
subsidiary Howard Investments Limited (3.6%). For the remaining free float,
the average daily volume traded has fallen since its peak in 2007 and has
remained stable at 800,000 shares over the last few years.
Figure 3: Top 5 shareholders
Shareholder Share
Wittington Investments Ltd 54.5%
Capital Group companies Inc 10.0%
Fidelity Management & Research 3.3%
Blackrock 3.2%
Associated British Foods trustee 2.0% Source: Bloomberg Finance L.P.19 July 2016
...of which a charitable foundation owns a majority stake
Wittington Investments Ltd is a company which manages investments in a
wide range of assets. Its largest is its shareholding in ABF but it also owns
Fortnum and Mason plc and Heal’s plc as well as real estate and other assets.
The Garfield Weston Foundation was set up in 1958 and is the beneficial
owner of 79.2% of Wittington Investments Ltd, and therefore ABF’s ultimate
controlling party. Its trustees are descendants of the Weston family, including
ABF’s CEO George Weston. The trustees are not remunerated for their work at
the foundation. The foundation states that all income is spent each year,
including on grants to a wide range of UK charities.
29 July 2016
Consumer Staples
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Page 8 Deutsche Bank AG/London
ABF is not affiliated to other Weston family businesses such as George Weston
Limited in Canada, which owns the publicly traded Loblaw and Weston Foods,
or Selfridges & Co. in the UK, but ABF does have common key management
personnel with these companies.
Financial summary
A £13bn revenue business
ABF’s diverse operations generated c.£13bn of revenues and profits of over
£1bn in 2015.
Figure 4: ABF generated revenues of c.£13bn in 2015 ... Figure 5: ... and group adjusted profits of over £1bn
5,6
22
5,9
96
6,8
00 8
,235 9,2
55
10,1
67
11,0
65
12,2
52
13,3
15
12,9
43
12,8
00
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Group Sales (£m)
555
561 622 664 720
909
920
1,0
77 1,1
80
1,1
63
1,0
92
0
200
400
600
800
1,000
1,200
1,400
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Group adj. EBIT (£m)
Source: Company data, year end September
Source: Company data, year end September
A number of P&L adjustments
A fuller P&L record is shown in Figure 6. Adjusted operating profit (adj. EBIT) is
reported after charging central costs and booking ABF’s share of post-tax
profits/losses from joint ventures and associates. There are numerous JVs and
Associates but these include Vivergo Fuels in Sugar (prior to 2015), and
Frontier Agriculture.
Figure 6: A bridge from adjusted operating profit to profit before tax
YE September 2006 2007 2008 2009 2010 2011 2012 *2013 2014 2015
Revenue 5,996 6,800 8,235 9,255 10,167 11,065 12,252 13,315 12,943 12,800
Adjusted operating profit (adj. EBIT)** 561 622 664 720 909 920 1,077 1,180 1,163 1,092
Net Profits on sale of non-current assets 10 8 10 -1 -9 5 -6 0 -11 8
Amortisation of non-operating intangibles -41 -74 -74 -82 -81 -83 -100 -92 -72 -55
Exceptional items -97 0 -46 -12 0 0 -98 0 0 -98
Operating profit 433 556 554 625 819 842 873 1,088 1,080 947
Net Profit/(loss) on business sale/closure -12 -39 5 -65 28 0 -9 -128 -2 -172
Net financial income/(expense) -2 -9 -32 -65 -84 -85 -103 -92 -58 -58
Adjusted Profit Before Tax 559 613 632 655 825 835 974 1,088 1,105 1,034
Profit Before Tax 419 508 527 495 763 757 761 868 1,020 717
Adjusted EPS p 50.9 53.0 54.9 57.6 72.2 74.0 87.2 98.1 104.1 102.1
EPS p 38.1 46.7 45.2 45.5 69.3 68.7 70.4 74.1 96.5 67.3
Source: Company data, Deutsche Bank * restated; ** includes central costs and share of JVs/associate profits and losses
Below adj. EBIT there are three charges taken which bridge to Operating profit.
These are [1] net profits on sale of non-current assets, [2] the amortisation and
impairment of non-operating intangibles. These are intangible assets that arise
29 July 2016
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Deutsche Bank AG/London Page 9
on business combinations and typically include technology, brands, customer
relationships and grower agreements; and [3] exceptional items. Exceptional
non-cash impairment charges in 2012 were taken for the Australian meat
business within George Weston Foods and in 2015 were taken largely for
shareholder loans to Vivergo Fuels.
Figure 7 sets out these adjustments to operating profit, sliced by division.
Figure 7: The adjustments to EBIT shown by division
2006 2007 2008 2009 2010 2011 2012 *2013 2014 2015
Adjusted operating profit (adj. EBIT)** 561 622 664 720 909 920 1,077 1,180 1,163 1,092
- Grocery 182 153 194 191 229 244 187 224 269 285
- Sugar 115 199 153 168 240 315 510 434 189 43
- Agriculture 15 18 33 34 33 40 40 47 50 60
- Ingredients 79 71 78 88 104 61 27 5 41 76
- Retail 185 200 233 252 341 309 356 513 662 673
- Central costs -22 -26 -28 -34 -42 -48 -48 -51 -49 -45
- Discontinued activities (within Adj EBIT) 7 7 1 21 4 -1 5 8 1 0
Total adjusting items -128 -66 -110 -95 -90 -78 -204 -92 -83 -145
- Grocery -8 -14 -81 -27 -14 -21 -114 -19 -44 0
- Sugar -93 -32 2 -26 -57 -29 -21 -21 -17 -130
- Agriculture -1 0 0 -13 3 -1 -1 -1 -2 1
- Ingredients -29 -28 -34 -29 -23 -27 -61 -51 -2 -1
- Retail 2 8 3 0 0 0 0 0 -14 -8
- Central costs 1 0 0 0 1 0 -7 0 -4 -7
Operating profit 433 556 554 625 819 842 873 1,088 1,080 947
- Grocery 174 139 113 164 215 223 73 205 225 285
- Sugar 22 167 155 142 183 286 489 413 172 -87
- Agriculture 14 18 33 21 36 39 39 46 48 61
- Ingredients 50 43 44 59 81 34 -34 -46 39 75
- Retail 187 208 236 252 341 309 356 513 648 665
- Central costs -21 -26 -28 -34 -41 -48 -55 -51 -53 -52
- Discontinued activities (within Adj EBIT) 7 7 1 21 4 -1 5 8 1 0 Source: Company data, Deutsche Bank * restated; ** includes central costs and share of JVs/associate profits and losses
Below operating profit sit net profits/losses on business sale/closure (Figure 6).
The two largest charges taken were in 2013 and 2015. In 2013 this was mostly
for disposals and closures in Ingredients in US, China and India, but also for
the disposal of a sugar business in Chifeng, north China. In 2015 these charges
were taken on ABF’s sale of two beet sugar factories in north China and to
account for the effective disposal of ABF’s original equity-accounted stake in
the Vivergo JV prior to assuming BP’s 47% interest in the business.
Retail (Primark) is today the largest division by both sales and adj. EBIT...
Retail is currently ABF’s largest division. It accounts for c.40% of group sales
and c.60% of group adj. EBIT (measured before central costs). Grocery is the
second largest division, generating a quarter of group sales and adj. EBIT.
Hence, after Primark, ABF’s second biggest brand in the group is Twinings, we
estimate representing c.5% of group sales and c.9% of group adj. EBIT.
29 July 2016
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Page 10 Deutsche Bank AG/London
The remaining divisions (Sugar, Agriculture and Ingredients) make smaller
contributions to sales and profits today. Retail has only recently begun to
dominate the group financially. As recently as 2012 the Sugar division
represented 46% of group profits and in 2005 Grocery accounted for 46% of
revenues. As of 2015, ABF’s most profitable sugar business, Illovo, was fully
consolidated in adj. EBIT but 51% owned, with its non-controlling share
deducted as a non-controlling interest at the net income level. It announced
the acquisition of the minority stake in 2016.
Figure 8: Retail currently generates c.40% of group
sales...
Figure 9: ...and c.60% of group adj. EBIT
Grocery
25%
Sugar
14%
Agriculture
9%Ingredients
10%
Retail
42%
Group Sales Split 2015
Grocery
25%
Sugar
4%
Agriculture
5%
Ingredients
7%
Retail
59%
Group adj. EBIT before central costs 2015
Source: Company data
Source: Company data
... and has been the main driver of sales and adj. EBIT growth in past decade
The summary growth rates of ABF’s separate divisions are shown in Figure 10.
Figure 10: Retail and Agriculture have grown profits fastest in the past 10 years
Sales £m Adj. EBIT £m Adj. EBIT margin % Sales CAGR % Adj. EBIT CAGR %
FY Sep-15 FY Sep-15 FY Sep-15 2005-15 2005-15
Group 12,800 1,092 8.5% 9% 7%
Grocery 3,177 285 9.0% 2% 4%
Sugar 1,818 43 2.4% 10% -13%
Agriculture 1,211 60 5.0% 5% 12%
Ingredients 1,247 76 6.1% 8% 2%
Retail 5,347 673 12.6% 18% 17%
Central/eliminations 0 -45 na na na
Source: Company data. Deutsche Bank
The story of the past decade is perhaps best summarised in Figure 11 and
Figure 12. Primark represented 60% of the group’s sales growth and virtually
all of the group’s adj. EBIT growth over the last decade. It has achieved this
through expansion in the UK and entering continental Europe.
Sugar has, in particular, experienced difficult trading since 2013 as a result of
falls in World and European sugar prices which have essentially been caused
by over-supply from larger than expected harvests. 2015 was notable for its
poor Sugar performance: divisional adj. EBIT fell from £189m to £43m as low
prices pushed down margins.
29 July 2016
Consumer Staples
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Deutsche Bank AG/London Page 11
Figure 11: Retail was over 60% of sales growth ... Figure 12:...and almost all the adj. EBIT growth 2005-15
5,614
12,810
587
1,118476
664
4,341
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
2005 Sales Grocery Sugar Agriculture Ingredients Retail 2015 Sales
Sales bridge, 2005 to 2015 (£m)
555
1,092
(24)
100
(123)
4011
533
0
200
400
600
800
1,000
1,200
2005 adj. EBIT
Central costs
Grocery Sugar Agriculture Ingredients Retail 2015 adj. EBIT
Adj. EBIT bridge, 2005 to 2015 (£m)
Source: Company data, continuing revenue
Source: Company data
The UK remains the biggest market
The UK and Europe & Africa are key regions for ABF. In 2015, the UK
generated 42% of group revenues and Europe & Africa a little behind at 32%.
The regional shares have seen little change since 2010, with the exception of
Europe & Africa growing in importance at the expense of Asia Pacific.
Figure 13: Over 70% of revenues come from the UK,
Europe and Africa...
Figure 14: ...and 80% of profits
UK
42%
Europe & Africa
32%
Americas
10%
Asia Pacific
16%
Revenues by geography, pre disposals 2015
UK
49%
Europe & Africa
31%
Americas
13%
Asia Pacific
7%
Group adj. EBIT by geography, pre disposals 2015
Source: Company data
Source: Company data
Exposure to a range of currencies
ABF is exposed to currency movements because of this diverse geographic
exposure. The company does not actively hedge the translation impact of
foreign exchange rate movements on the income statement but receives
foreign currency earnings and fixes its currency rates at the point of
purchasing goods and services.
The currency exposure varies by division but generally a weak Sterling against
Euro and US Dollar is favourable for the group. In Grocery the effects are
mostly translation. We estimate that around 40% of Grocery sales are UK with
the other main currencies being Euro, US Dollar and Australian Dollar. In Sugar
there are translation effects from China, Southern Africa and Spain. There is
also a transactional effect at British Sugar, where its end sale is priced in Euros
but its costs are in Sterling. As a result we estimate that less than 10% of
Sugar sales are in Sterling. In Retail the movement of Sterling is more
conflicting. With around half of sales and profits in the UK and the rest in
29 July 2016
Consumer Staples
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Page 12 Deutsche Bank AG/London
Euros, weak Sterling has a positive translation effect. However, about 80% of
costs of goods sold are in US dollars, so strength of USD against Sterling and
Euro causes higher purchasing costs. In Agriculture, the main business AB
Vista supplies yeast and natural nutrients to the global animal nutrition
industry. It is headquartered in the UK but operates regional hubs in Brazil,
India, North America, Singapore and Spain. Agriculture also operates AB Agri
China and some UK-only businesses such as the Frontier Agriculture JV. In
Ingredients, the majority of the division is AB Mauri which is a global supplier
of yeast and bakery ingredients to more than 90 countries. It has both non-
Sterling sales and operating costs.
Share price performance
Total shareholder returns have closely followed EPS. Since 2010 the expansion
of Primark in Europe has helped ABF shares outperform the FTSE100. In recent
years Sugar profit declines have partly offset the profit growth in Retail.
Figure 15: ABF has outperformed the market since 2010,
largely as a result of Primark’s success
Figure 16: EPS revisions were downward in FY Sep-15
40
50
60
70
80
90
100
110
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
10.00
11.00
2000 2002 2004 2006 2008 2010 2012 2014 2016
EP
S (
p)
Tota
l share
hold
er
retu
rn r
ela
tive t
o F
TS
E100
ABF performance relative to FTSE100
Total shareholder return (LHS)
EPS (RHS)
40
50
60
70
80
90
100
110
120
130D
ec 0
4
Dec 0
5
Dec 0
6
Dec 0
7
Dec 0
8
Dec 0
9
Dec 1
0
Dec 1
1
Dec 1
2
Dec 1
3
Dec 1
4
EPS momentum (p)
2008 2009
2010 2011
2012 2013
2014 2015
Source: Deutsche Bank, Datastream, company data. We have used annual adjusted EPS and the latest reported figure is for FY Sep-15; data correct as of 22 July 2016
Source: Deutsche Bank, IBES, Datastream; data correct as of 22 July 2016
Strategy
The five business segments are managed separately, with the corporate centre
agreeing divisional strategy and budgets as well as managing the group
balance sheet. The corporate centre also provides some shared services, such
as finance, procurement, and sharing best practice. Broadly the group-wide
strategy is to develop strong and sustainable positions in their markets through
both organic growth and acquisitions.
On a divisional basis, the strategies differ:
In Grocery it is to develop and grow its brands, depending on their
stage of development, in new and existing markets. This can be
through both product innovation and range extension. It also
selectively pursues M&A;
In Sugar its aim is to be a world-leading sugar business. Its strategy is
to reduce the cost base to make it more profitable at current sugar
prices and for a post-quota world. Additionally the division aims to
29 July 2016
Consumer Staples
A B Foods
Deutsche Bank AG/London Page 13
expand its co-product operations, including ethanol and power
generation;
Agriculture aims to improve the sustainability of food production and
make agri-food production more efficient through innovation and
partnerships. It aims to diversify geographically both organically and
through the pursuit of strategic acquisitions and partnerships;
In Ingredients the strategy is to provide a relevant supply of
ingredients and technology to its customer base. It aims to grow by
serving its customers backed by high levels of research and
development and investment in technology;
In Retail the focus is on organic expansion opportunities in Europe and
in the US, in regions where it already has operations.
Balance sheet
A strengthening balance sheet
ABF currently has the lowest level of gearing in a decade. In FY Sep-11, net
debt was £1.3bn but by the end of FY Sep-15 it had declined to £0.2bn. Net
debt balances tend to be higher at the H1 balance sheet date, implying
average annual net debt is several hundred millions higher than at year end.
Adjusted net debt/EBITDAR currently stands at 1.2x, after a steady decline
since 2011. Management has indicated on several occasions that it is
comfortable that the cash position of the company would enable it to carry out
any investment projects. To quote George Weston at the company’s full year
results presentation for FY Sep-12: “...the balance sheet is the servant of the
business, not the other way round”.
Figure 17: Net debt has been declining Figure 18: Adjusted net debt/EBITDAR is 1.2x
212
-298 -311
-791
-999
-816
-1,285
-1,061
-804
-446
-194
-1,400
-1,200
-1,000
-800
-600
-400
-200
0
200
400
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Net cash/(debt) £m
0.1 x
1.0 x 0.9 x
1.4 x
1.6 x
1.4 x
1.6 x1.5 x
1.4 x
1.2 x 1.2 x
-0.3 x
0.4 x 0.4 x
0.9 x1.0 x
0.7 x
1.0 x
0.7 x
0.5 x
0.3 x0.1 x
-0.5
0.0
0.5
1.0
1.5
2.0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Adj net debt/EBITDAR Net debt/EBITDA
Source: Deutsche Bank, company data
Source: Deutsche Bank, company data. Leases capitalised at 8x
£2bn of firepower from committed debt facilities
ABF has total committed facilities amounting to £2.1bn, of which over half
(£1.2bn) is in the form of a revolving credit facility that matures in July 2020.
The remainder of the group’s debt facilities consist of £0.6bn of US private
placement notes and £0.3bn of locally committed funds in Africa and Spain.
ABF owns a large proportion of its land and buildings...
ABF’s operating lease charge on property rentals in FY Sep-15 was £192m.
These are typically fixed leases with no contingent (turnover-related) portion.
We know from Primark’s UK subsidiary accounts (Primark Stores Ltd) that the
UK rental charge was £81.1m (42% of the group operating lease charge).
29 July 2016
Consumer Staples
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Page 14 Deutsche Bank AG/London
ABF had land and buildings on its balance sheet of £2,255m at cost with a net
book value of £1,759m as at September 2015. The majority of this, we believe,
relates to Primark store freeholds in UK and Ireland. The company does not
revalue its properties within its balance sheet but in September 2007 disclosed
a valuation of Primark properties: £1.0bn on a vacant possession, £1.26bn with
a Primark covenant and £0.58bn in net book value. Since 2007 ABF has added
c.£140m of Primark UK freehold at cost and c.£550m of freehold across the
group and all of its divisions. If we assume three-quarters of this relates to
Primark then we estimate a rental shield of c.£75m, which in turn implies that
Primark’s EBIT margin is around 140bps higher than it would be if it operated
on a fully leased basis.
Figure 19: Net Book Value of land and buildings within ABF and Primark UK
Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15
Net book value of Land & Buildings 1,097 1,278 1,487 1,610 1,778 1,751 1,796 1,824 1,759
- Freehold 874 976 1,161 1,249 1,385 1,365 1,388 1,399 1,360
- Long leasehold 153 214 242 271 295 290 313 322 301
- Short leasehold 70 88 84 90 98 96 95 103 98
ow Net book value of Primark 579 NA NA NA NA NA NA NA NA
ow NBV of Primark UK* 420 413 472 487 491 504 509 510 510
Primark valuation on vacant possession 1,002 NA NA NA NA NA NA NA NA
Valuation on Primark covenant 1,262 NA NA NA NA NA NA NA NA Source: Deutsche Bank, company data, * Primark Stores Ltd accounts Note: Company disclosed an external valuation in its FY Sep-07 annual report
... although off balance sheet liabilities are significant
Despite ABF’s property ownership it still has significant operating lease
liabilities. As at September 2015 its minimum future lease payments were
£3.5bn and total operating lease charges during the year were £206m. Dividing
the two gives a rough sense of an average lease length being 17 years.
However, management has suggested that the leases coming on balance
sheet under the new accounting standards at the end of the decade would be
in the ‘order of some £2bn’.
29 July 2016
Consumer Staples
A B Foods
Deutsche Bank AG/London Page 15
Figure 20: ABF’s operating lease base has increased by 5x since 2005
684870
1,210
1,5251,657
1,898
2,5182,733
2,884
3,3113,511
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Future minimum operating lease payments at YE(land & buildings)
Within 1 year 1-5 years After 5 years
Source: Deutsche Bank, Company data
Capital expenditure is increasingly focussed on retail
Capex has been spent at Primark on store openings, expansions, relocations
and improvements to its distribution facilities. In the other businesses,
management has focussed on improving efficiency (e.g. Allied Bakeries),
opening new production plants (e.g. AB Mauri) and re-launching brands (e.g.
Twinings).
Figure 21: Capex* has declined since 2011, but investment into Primark has
remained steady
403445 427
575 579
726844
714
616
708
614
0
1
2
3
4
5
6
7
8
9
0
100
200
300
400
500
600
700
800
900
1,000
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Other (£m LHS) Primark (£m LHS) Capex/Sales (% RHS)
Source: Deutsche Bank, company data, * excluding acquisitions
Return on capital is highest in retail
Returns vary by division, as Figure 22 shows. Returns are highest in Retail and
Grocery, although historically Sugar returns have been higher. The returns
shown for Retail are influenced by the proportion of freehold in its mix, which
has been declining. We discuss Primark’s returns in the Retail chapter.
29 July 2016
Consumer Staples
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Page 16 Deutsche Bank AG/London
Figure 22: Return on average capital employed* is highest in the Retail and
Grocery divisions
Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15
Grocery 19.7% 17.6% 12.2% 16.9% 20.8% 22.5%
Sugar 14.0% 17.3% 26.5% 23.3% 10.5% 2.4%
Agriculture 18.1% 19.0% 16.5% 16.4% 17.3% 19.2%
Ingredients 8.3% 8.3% 4.3% 0.6% 5.8% 11.1%
Retail 23.5% 18.2% 19.2% 26.0% 33.2% 31.1% Source: Company data (pre-tax, ex leases), *Company definition: Adj EBIT/average capital employed
Pension fund is well funded
The company has defined benefit pension schemes which mostly relate to the
UK. The UK scheme was closed to new entrants in October 2002. At FY Sep-15
it had an IAS19 net deficit of £16m with scheme assets and liabilities of £3.6bn
and having made cash contributions of £39m during the year. A triennial
valuation of the UK scheme was undertaken as at 5 April 2014. The scheme
had a surplus of £90m so there is no recovery plan in place.
Figure 23: ABF has relatively low valuation sensitivity to changes in discount & inflation rates
FY Sep-15 Market Cap £m
Assets £m Liabilities £m
Net -25bps discount rate (£m)
+25bps inflation
(£m)
Discount sensitivity/m
arket cap
Inflation sensitivity/m
arket cap
Discount rate used
(%)
Inflation rate used
(%)
ABF UK pension 21,264 3,343 -3,253 90 -150 -133 1% 1% 3.8% 3.3%
ABF Overseas pension 21,264 291 -391 -100 na na na na 0.9-16.3% 0-7.4%
Irrecoverable surplus -6 na na na na na na
Total 21,264 3,634 -3,644 -16 na na na na na na
Source: Company data (last financial year), Deutsche Bank, Thomson Reuters (29 Jun 2016)
Dividends are considered against adjusted EPS
Dividends have steadily risen over the last decade and were 35p per share in
2015. This resulted in a payout ratio of c.50%, significantly higher than its 10
year average of c.40%, as shown in Figure 24. The board has a progressive
dividend policy and considers dividends against its Adj EPS metric.
Figure 24: Dividends have been rising since 2005 Figure 25: 2015 had a bumper payout ratio
18 19 20 20 21
2425 25
32
3435
0%
5%
10%
15%
20%
25%
30%
0
5
10
15
20
25
30
35
40
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
DPS (LHS) Growth rate (RHS)
37%
49%
42%
45%46%
34%36% 36%
44%
35%
52%
0%
10%
20%
30%
40%
50%
60%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Dividend payout ratio 10 yr average
Source: Deutsche Bank, company data
Source: Deutsche Bank, company data
29 July 2016
Consumer Staples
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Deutsche Bank AG/London Page 17
Grocery
Grocery division in the group context
Grocery’s contribution to ABF has been declining
Over the past decade Grocery has reduced as a proportion of group sales. In
2005 it was ABF’s largest business, accounting for 46% of group revenues.
This has steadily declined to 25% by 2015, as a result of Primark’s fast growth.
Figure 26: While its contribution to group sales has
declined since 2005...
Figure 27: ...its adj. EBIT* contribution has been more
stable and has recovered to a quarter of the group
46%
43%
38%
34%
34%
34%
33%
30%
27%
26%
25%
54%
57%
62%
66%
66%
66%
67%
70%
73%
74%
75%
0%
25%
50%
75%
100%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Grocery as a % of salesGrocery Other
32%
32%
24%
28%
26%
24%
25%
17%
18%
22%
25%
68%
68%
76%
72%
74%
76%
75%
83%
82%
78%
75%
0%
25%
50%
75%
100%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Grocery as a % of adj. EBIT
Grocery Other
Source: Company data, Deutsche Bank
Source: Company data, Deutsche Bank; * adj. EBIT before central costs
Description of ABF’s Grocery division
Manufactures and sells grocery brands
Grocery is the second largest division within ABF, producing a quarter of
revenues and adj. EBIT. The grocery business manufactures and sells a variety
of consumer facing brands. It operates across hot beverages, sugar, vegetable
oils, world foods, baked goods, herbs & spices and meat, and a
comprehensive list of brands were shown in Figure 2.
Figure 28 and Figure 29 show an estimated breakdown of revenue and profit
by brand. The company does not disclose these figures, however we estimate
Twinings Ovaltine to be its leading subdivision, generating c.30% of Grocery
revenues and c.60% of Grocery profits. ACH and Allied Bakeries also produce a
significant proportion of revenues; however we estimate they achieve single-
digit profit margins.
29 July 2016
Consumer Staples
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Page 18 Deutsche Bank AG/London
Figure 28: Twinings Ovaltine generates an estimated
c.30% of Grocery revenues...
Figure 29: ...and 60% of Grocery Adj. EBIT at a margin of
17%
Twinings Ovaltine31%
Allied Bakeries19%
ACH15%
Jordans Dorset Ryvita
5%
World Foods5%
Other25%
Grocery Revenue 2015E
Twinings Ovaltine60%
ACH12%
Allied Bakeries10%
World Foods7%
Jordans Dorset Ryvita
6%
Other5%
Grocery Adj. EBIT 2015E
Source: Deutsche Bank estimates
Source: Deutsche Bank estimates
Below we summarise the key businesses and brands:
Twinings Ovaltine: merged in 2003 after the acquisition of Ovaltine for
£171m, these two brands are sold internationally. Twinings sells a
range of premium teas and Ovaltine sells malt based drinks. We
estimate Twinings to be slightly bigger than Ovaltine;
Jordans, Dorset & Ryvita: Dorset Cereals was acquired in October
2014 for £60m, and has been integrated with the Jordans Ryvita
business. Jordans and Dorset sell premium cereals, and Ryvita sells
crispbreads;
ACH: operates in North America and Mexico and its main business is
in edible oils (corn, olive, canola or rapeseed) through the brands
Mazola (in the US) and Capullo (in Mexico). ACH also sells herbs,
seasoning and spices;
Allied Bakeries: produces and sells bread in the UK. Its primary brand
is Kingsmill;
Other businesses include George Weston Foods (the Australian bread,
meats and baked goods division), AB World Foods and Westmill
Foods that sell a range of ethnic food brands (including Patak’s, Blue
Dragon and Elephant Atta) and Silver Spoon which sells refined sugar.
Track record and performance
Becoming a higher margin business
Over the last decade, grocery sales and profits have benefitted from several
acquisitions as well as strong performances from key brands including
Twinings and Ovaltine. As of recent years however, the business has faced
pressures from food commodity price deflation and tough competition, which
has resulted in declining revenues.
Grocery adj. EBIT has been volatile over the last decade and after a dip in 2012
(due to restructuring costs at George Weston Foods and Allied Bakeries and
the price pressures mentioned above) it has significantly recovered. Indeed
while revenues have fallen, adj. EBIT has risen since 2012. This is a reflection
of successful investment programmes and cost reduction measures at Allied
Bakeries as well as strong performances from Twinings Ovaltine, ACH and
29 July 2016
Consumer Staples
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Deutsche Bank AG/London Page 19
George Weston Foods. FY Sep-13 was also restated to transfer a flour milling
business of George Weston Foods from Grocery to Ingredients. The main
effect was to remove £272m from Grocery revenues in FY-13 and also boosted
margins by 30bps.
Figure 30: Revenues have fallen due to price deflation... Figure 31: ...but adj. EBIT has risen on the back of
increased efficiencies and product innovation
2,590 2,578 2,605
2,820
3,188
3,406
3,671 3,7263,568
3,3373,177
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Grocery sales £m
185 182
153
194191
229244
187
224
269
285
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
0
50
100
150
200
250
300
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Grocery adj. EBIT £m Grocery adj. EBIT margin %
Source: Company data, Deutsche Bank
Source: Company data, Deutsche Bank
Market share and competitive landscape
Due to the diverse brands owned by the grocery business that span numerous
industries and geographies, in this section we delve deeper into the key brands
by looking at the markets in which they operate and their key drivers.
Twinings: developing its premium range globally
We estimate that Twinings is a c.£700m brand by revenues and that the UK
contributes around one fifth of its sales. Twinings is the number 2 brand in the
£800m UK market (Euromonitor, 2015) and it has rapidly grown its market
share since 2012. Its 17% share however masks key differences within the
different subsectors, as shown in Figure 33 to Figure 35. Twinings dominates
the fruit/herbal and green tea markets by a clear distance as a result of its
refreshed product ranges, formats and advertising campaigns. In black tea the
market is less concentrated, with Twinings holding a 13% share in 2015.
Figure 32: Twinings is the second largest player in the
UK tea market, with a 17% market share
Figure 33: It is the number 4 player in Black Teas...
PG Tips (Unilever)18%
Twinings (ABF)17%
Tetley (Tata Global Beverages)
14%
Private label13%
Yorkshire (Betty's & Taylors Group)
10%
Typhoo (Apeejay Surrendra Group)
4%
Clipper (Koninklijke Wessanen)
3%
Other14%
UK tea market 2015
PG Tips (Unilever)25%
Tetley (Tata Global Beverages)
17%
Private label15%
Yorkshire (Bettys & Taylors Group)
15%
Twinings (ABF)13%
Typhoo (Apeejay Surrendra Group)
5%
Clipper (Koninklijke Wessanen)
3%
Others7%
UK Black Tea market share, 2015
Source: Euromonitor
Source: Euromonitor
29 July 2016
Consumer Staples
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Page 20 Deutsche Bank AG/London
Figure 34: ... but it is the clear market leader in an
otherwise fragmented fruit/herbal tea market...
Figure 35: ...as is the case in the green tea market, in
which Twinings has a 32% market share
Twinings (ABF)33%
Private label10%
Pukka (Pukka Herbs)
6%
Yogi Tea (East West Tea Co)
4%
Tetley (Tata Global Beverages)
1%
Others31%
UK Fruit/Herbal Tea market share, 2015
Twinings (ABF)32%
Clipper (Koninklijke Wessanen)
17%
Tetley (Tata Global Beverages)
17%
Private label6%
PG Tips (Unilever Group)
3%
Jacksons of Piccadilly (ABF)
3%
Others21%
UK Green Tea market share, 2015
Source: Euromonitor
Source: Euromonitor
We estimate that Twinings is the division’s most profitable brand, though
management has only gone so far as to confirm that it generates margins in
excess of 10%. Twinings has driven growth by successfully expanding its
premium product range and improving packaging. The re-launch of its
Infusions range combined with marketing investment drove sales in 2013. This
was subsequently furthered by developments in their green tea and specialty
black tea ranges, which have been particularly successful in developed
markets.
International expansion is the second part to the growth story and Twinings is
now sold in over 100 countries. Figure 36 shows the countries with the largest
market shares. Despite having a global presence, Twinings only holds more
than a 10% market share in less than a quarter of the countries (where data is
available). In particular, Twinings holds a large market share in primarily
developed countries and it has a long tail of smaller shares in less developed
regions. Of this, we estimate that the UK, USA and Australia are Twining’s key
markets by sales.
Figure 36: Twinings’ key markets are the UK, Australia
and the USA
Figure 37: Twinings has grown its market share in
Australia and the UK since 2013
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Norw
ay
Dom
inic
an R
epublic
Fin
land
Austr
alia
Sw
eden
Italy
Gre
ece
United K
ingdom
Denm
ark
Nig
eria
Fra
nce
Sw
itzerland
Guate
mala
Iran
Irela
nd
Cam
ero
on
Belg
ium
New
Zeala
nd
Hungary
Thaila
nd
US
A
Saudi A
rabia
Spain
United A
rab E
mirate
s
Slo
venia
Nort
h A
merica
Bulg
aria
Au
str
ia
Slo
vakia
Hong K
ong, C
hin
a
Rom
ania
Uru
guay
Canada
Twinings market share by country, 2015
0%
5%
10%
15%
20%
25%
30%
2010 2011 2012 2013 2014 2015
Twinings market share in its key markets
Australia
UK
USA
Source: Deutsche Bank, Euromonitor, Key markets are highlighted in grey
Source: Deutsche Bank, Euromonitor
29 July 2016
Consumer Staples
A B Foods
Deutsche Bank AG/London Page 21
Ovaltine: a high margin business in concentrated markets
Ovaltine was acquired from Novartis in 2002 for £171m and management and
operations were combined with ABF’s existing Twinings business in 2003 to
create a single business unit called Twinings Ovaltine. Like Twinings, it is an
international brand. However, its focus is on developing markets due to the
nutritional content of malt barley: indeed its advertising slogan is ‘Nutritiously
Delicious’.
We estimate that Ovaltine’s sales were around £300m in FY Sep-15. According
to Euromonitor estimates, Thailand is Ovaltine’s largest market, generating
sales of £63m in 2015. Other important markets are China, USA, Nigeria and
Indonesia.
As the market shares in Figure 39 demonstrate, the niche malt-based drinks
market is highly concentrated and is characterised by one player dominating
each regional market. In Asia, Ovaltine’s largest competitor is Milo (owned by
Nestle). In 60% of the 29 markets in which data was available, Ovaltine has a
market share of over 20%. This affords a level of pricing power and thus EBIT
margins above 10%.
Figure 38: We estimate that Ovaltine’s largest market by
sales is Thailand
Figure 39: Ovaltine has a large market share in c.60% of
the markets studied*
63
30
21 20
13
0
10
20
30
40
50
60
70
Thailand China USA Nigeria Indonesia
Ovaltine: Top 5 markets by sales £m, 2015
10098 97
8780
75
59 59 5853 52 50
3935 35
31
21 19 1712 12
8 8 7 73 2 2 2
0
10
20
30
40
50
60
70
80
90
100
Bra
zil
Austr
ia
Belg
ium
Neth
erland
s
Hung
ary
Thaila
nd
Sw
itze
rland
Canad
a
Fra
nce
No
rth A
merica
US
A
Taiw
an
Saud
i A
rab
ia
Chin
a
Ho
ng
Ko
ng
, C
hin
a
Irela
nd
United
Kin
gd
om
Vie
tnam
Ge
rmany
Ind
onesia
United
Ara
b E
mirate
s
Po
rtug
al
New
Zeala
nd
Phili
pp
ines
Sin
gap
ore
Austr
alia
Gre
ece
Mala
ysia
Venezu
ela
Ovaltine market share (%) by country, 2015
Source: Euromonitor, Deutsche Bank
Source: Euromonitor, Deutsche Bank, *key markets highlighted in grey
Jordans, Dorset & Ryvita: a venture into healthy snacking
Jordans, Dorset & Ryvita was formed in 2014 and is the product of acquisition,
acquiring Ryvita back in 1949, Jordans over the period 2007-13 and Dorset
Cereals in 2014. All three brands have a growing international presence though
their principle market is the UK. Ryvita is the clear market leader in bread
substitutes in the UK, a £78.1m market, with a 42% market share. Jordans and
Dorset Cereals operate in the much larger breakfast cereals market, worth
£1.9bn in the UK and hold a 2% and 1% share respectively.
Key drivers of these brands are product innovation, the continuation of the
shift towards healthy eating, international expansion in targeted markets and
increases in disposable income. An example of innovation was the 2008
launch of ‘Ryvita Thins’, a snack product designed for dipping and positioned
for the trend towards healthier snacking. The launch created a new product
category in the UK and has seen significant growth.
29 July 2016
Consumer Staples
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Page 22 Deutsche Bank AG/London
Allied Bakeries and ACH: low margin businesses
While these businesses generate a large proportion of revenues, about £1bn in
FY Sep-15, we estimate that they achieve single digit adj. EBIT margins, hence
below those of Twinings Ovaltine and Jordan’s, Dorset & Ryvita. Both Allied
Bakeries and ACH have suffered from challenging competition and increased
cost pressures.
Kingsmill, Allied Bakeries’ main brand, currently has a 12% share in a
concentrated UK bread market. Due to price deflation in the category, margins
have eroded. Allied Bakeries embarked on a 5 year investment programme to
improve efficiency and product quality, which completed in 2015. Allied
Bakeries has also diversified its offering, introducing new lines to complement
its existing bread range. Examples include the introduction of ‘Sandwich Thins’
in 2014 and new bread variants such as Great White.
ACH also operates in a competitive market and in Figure 41 we show that its
key brand, Mazola, holds a 9% share of the market. The brand has stemmed its
falling market share in recent years through successful advertising campaigns
highlighting the health benefits of corn oil.
The low margin nature of both Allied Bakeries and ACH means that sales and
profits are driven by volumes. In addition, in the near future we believe key
drivers will be new product launches (for Allied Bakeries), advertising
campaigns and changes to their existing contracts with supermarkets.
Figure 40: The UK bread market is held by 4 key players,
of which Kingsmill has a 12% share
Figure 41: Mazola oil is number 3 in the US oil market,
with a 9% market share
Artisanal
22%
Warburtons
(Warburtons Ltd)
18%
Hovis (Premier
Foods Plc)
14%
Private label
14%
Kingsmill (ABF)
12%
Others
10%
UK Bread market 2015
Wesson (ConAgra
Foods Inc)
11%
Crisco (JM
Smucker Co)
12%
Mazola (ABF)
9%
Pam (ConAgra
Foods Inc)
8%
LouAna (Ventura
Foods)
4%
Private label
42%
Others
14%
USA Vegetable and seed oil market 2015
Source: Euromonitor
Source: Euromonitor
George Weston Foods operates in Australia and New Zealand. It develops and
manufactures consumer brands which it supplies to restaurants and
supermarkets and it supplies ingredients to third party brands. There are four
main parts to the business: [1] Tip Top, a bakery business producing breads,
muffins and crumpets; [2] Don, a small goods business selling packaged
meats; [3] Mauri anz, which supplies bakery ingredients; and [4] Jasol, a
hygiene solution business.
29 July 2016
Consumer Staples
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Deutsche Bank AG/London Page 23
Strategy and the future
A result of ABF’s decentralised management, each division within Grocery has
its own strategy. The Twinings brand strategy is to develop and expand the
product range. Ovaltine continues to expand internationally and develop its
range of malt-based products. Jordans and Ryvita aim to expand in its core
markets, while management continue to premiumise the Dorset brand.
Additionally, management has indicated that it will acquire new brands when
the opportunity arises.
29 July 2016
Consumer Staples
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Page 24 Deutsche Bank AG/London
Sugar
Sugar division in the group context
Current contribution to group underplays importance of the division
Sugar is probably the most complex division within the group, where
commodity costs and regulation meet business in three continents. Sugar
currently represents only a small proportion of ABF, generating 14% of group
revenues and only 4% of group adj. EBIT in FY Sep-15. However, this has not
always been the case. Its profits fell from £510m in FY Sep-12 to £43m in FY
Sep-15 and therefore its current contribution may underplay its future
importance to the group mix.
Figure 42: Sugar accounted for c.15% of sales in 2015... Figure 43:...and only 4% of adj. EBIT*
12%
11%
17%
15%
16%
19%
19%
22%
20%
16%
14%
88%
89%
83%
85%
84%
81%
81%
78%
80%
84%
86%
0%
25%
50%
75%
100%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Sugar as a % of salesSugar Other
29%
20% 3
1%
22%
23%
25% 33% 4
6%
35%
16%
4%
71%
80% 6
9%
78%
77%
75% 67% 5
4%
65%
84%
96%
0%
25%
50%
75%
100%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Sugar as a % of adj. EBITSugar Other
Source: Company data, Deutsche Bank
Source: Company data, Deutsche Bank; * adj. EBIT before central costs
An introduction to the sugar industry
A story about beet and cane
Sugar is a simple carbohydrate with a complex production process. Sugar can
be extracted from cane and beet. We highlight the principle differences
between the two crops in Figure 44.
Figure 44: The differences between beet and cane sugar
Beet Cane
What is it? Underground root crop Type of grass
Where is it primarily grown?
Western, Central and Eastern Europe, USA, China, Japan
Brazil, Cuba, Mexico, India, Australia
Length of production cycle
Less than 1 year Up to 4 years
When is it grown? Sown in March, harvested in September - February
Anytime
What are the optimal weather conditions?
Mild, humid conditions. Dry and sunny periods before harvest
Tropical climate
What are the costs associated with it?
Higher cost of production but produces useful by-products
Has a lower cost of production
Sugar content 13-18% 10-15%
Source: Deutsche Bank, ECRD, FAO
29 July 2016
Consumer Staples
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Deutsche Bank AG/London Page 25
The sugar content of beet is affected by the weather and depends on the type
of beet grown. Frost in particular can damage the quality of beet and the
quantity of sugar produced.
A high-energy production
There are 4 main variables in a sugar business:
Volume: in Europe the EU sugar regime currently restricts volumes,
though as we describe shortly this is coming to an end. Elsewhere
increasing capacity or improving the sugar content of the crop can
increase volumes.
The price paid to farmers for beet/cane. This is the biggest cost of
sugar production (Figure 46). For AB Sugar this is its purchase of cane
and beet from out-growers or the cost of its own cane fields in
Southern Africa. In the UK the price for beet is negotiated by the
National Farmers Union (NFU) and set over a year in advance (see
Figure 51); in the European Union the price is agreed through regional
councils in Spain. Around 6-8 tonnes of beet crop are required to make
1 tonne of sugar, depending on the crop.
Energy costs to process the sugar. The second largest cost is
processing energy costs and also the general overheads of running the
sugar refineries. Costs can be offset by generating power from
biomass by-products to meet internal needs and export power into the
local grid.
The price the sugar processor charges to its customers. The world
benchmark contract for sugar trading is the Sugar No. 11 future. This
is quoted in US dollar cents per lb (and shown in Figure 63). The Sugar
No. 11 contract prices the physical delivery of raw cane sugar (free on-
board the receiver’s vessel in the country of origin of the sugar). The
by-products of sugar beet production can be monetised. The residual
pulp resulting from sugar extraction is dried and used in animal feeds
and molasses can be used in alcohol fermentation and in the
production of yeast.
Figure 45: The sugar beet farming calendar Figure 46: A simplified illustration of the sugar P&L
Profit
Processing costs
Beet costsBeet costs
0
20
40
60
80
100
Year 1 Future
Profit?
Fixed with
farmers
Energy costs and
overheads
Source: Company data (British Sugar), Deutsche Bank
Source: Deutsche Bank
The production of sugar from beet and cane is similar and can be simplified
into 4 processes:
29 July 2016
Consumer Staples
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Page 26 Deutsche Bank AG/London
Extraction: to extract sugar from beet, hot water is forced past beets
using a process of diffusion. Sugarcanes are pressed to extract their
sugar syrup. The result of both processes is a liquid containing sugar;
Evaporation: these liquids are boiled, leaving a thick sugary syrup;
Crystallisation: this syrup is turned into crystals called raw sugar;
Refining: raw sugar is then refined to produce the end product. Brown
sugars (such as Muscovado and Demerara) are the result of relatively
less refinement. White sugar requires further refining to produce
smaller crystals.
What is sugar used for?
The output of sugar processing can broadly be split into core products and co-
products. Core products are the range of sugars that can be produced. Whilst
some ends up in retail use (e.g. granulated, icing, brown, and fair trade sugars)
most sugar produced is used for commercial and industrial purposes. This can
include food manufacturing (e.g. powdered, crystal, liquid, inverted or caster
sugars to provide taste, texture and structure in foods and drink) and
pharmaceutical use (e.g. liquid sugar used in lozenges and syrups or silk sugar
in chews). There are also a number of co-products. Bioethanol is produced
through the fermentation of sugarcane juice and molasses, and this can be
blended with gasoline to reduce petroleum use and improve vehicle emissions.
Specialty products can be made from the by-products of sugar beet processing.
Sugar beet pulp and molasses are used in the production of solid and liquid
animal feeds, dried sugar cane pulp (bagasse) can be used to make paper,
plastics and building materials, or burned to generate power and the carbon
dioxide generated from processing sugar can be used to grow tomatoes.
Brazil, India and the EU are the largest producers of sugar
The global sugar production on a country level is shown in Figure 47 and
Figure 48. Brazil, India and the EU produce just less than half of the world’s
sugar collectively. Beyond that, the remaining share is made up of many
different countries.
As a result of its high sugar production, Brazil and India are net exporters of
sugar, supplying 44% and 4% respectively of the sugar export market. In turn,
the EU is a net sugar importer due to regulation in the EU sugar market which
we discuss shortly. These regulations are due to ease in 2017 and have the
potential to result in an increase in output from the EU.
Figure 47: Brazil is the largest sugar producer... Figure 48: ...producing c.20% of the world’s sugar
Total Production (1,000 metrics tons, raw value) in 2014/15 175,103
Brazil 35,950
India 30,240
European Union 16,750
China 11,000
Thailand 10,790
United States 7,845
Mexico 6,344
Pakistan 5,230
Australia 4,700
Russia 4,350
Brazil
21%
India
17%
European Union
10%Thailand
6%
China
6%
United States
4%
Mexico
4%
Pakistan
3%
Australia
3%
Russia
2%
Other
8%
Global Production of Sugar by Country 2014/15
Source: Foreign Agricultural Service/USDA
Source: Foreign Agricultural Service/USDA
29 July 2016
Consumer Staples
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Deutsche Bank AG/London Page 27
Figure 49: Brazil makes up just under half of the world’s
sugar exports ...
Figure 50: ... while global sugar imports are more
fragmented
Brazil
44%
Thailand
15%
Australia
7%
India
4%
Guatemala
4%
European Union
3%
Mexico
3%
Other
5%
Sugar exports by country 2014/15
China
10%
Indonesia
6%
US
6%
EU
5%
UAE
5%
Malaysia
4%
Bangladesh
4%South Korea
4%Algeria
4%
Other
22%
Sugar imports by country 2014/15
Source: Foreign Agricultural Service/USDA
Source: Foreign Agricultural Service/USDA
The current regulations in EU – quotas, minimum prices, tariffs
In 2006 a first round reform to the EU sugar market began and set the basis of
today’s market. The reforms aimed to provide a market to developing countries
associated with the EU. Quotas were put in place such that EU sugar
production was in structural deficit with the idea that developing countries
would fill the gap by exporting cane sugar. This was also in response to
dumping accusations by the WTO. Overall, this resulted in the EU becoming a
net sugar importer. The problem was that the developing countries were
unable to increase production sufficiently and the cut to EU production led to a
sharp increase in world sugar prices. This made it less attractive to sell sugar
into the EU market so the EU Commission applied exceptional measures to
allow greater supply and limit price increases. These, in hindsight, lasted too
long, resulting in over-supply in the EU. Coupled with global surpluses this led
to a dramatic fall in world prices.
The current regulations in place are summarised below:
EU production quota: this limits annual sugar production in the EU to 13.5m tonnes for use in food industries. Production in excess of this quota can be exported (but is limited by the WTO to 1.3m tonnes), offset against next year’s quota or sold for use in non-food industries. Producers are awarded quota shares based on their volume market share in the EU. British Sugar has approximately 10% of the EU sugar production quota;
Tariff-rate quotas: these limit the amount of sugar that can be imported into the EU at reduced or zero duty from ‘less-developed countries’ and certain African, Caribbean and Pacific regions. Beyond this quota a tariff is charged on imports from all other regions (€419/tonne for white sugar and €339/tonne for raw sugar);
Minimum guaranteed price to farmers: this is calculated using farmers’ input costs, euro exchange rates and wheat prices;
EU reference price: a price around which wholesale prices should fluctuate. In order to reach the reference price, the EU Commission can force sugar producers to withdraw sugar from the market.
As a result of these regulations the EU sugar price is higher than the world
sugar price.
29 July 2016
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30 September 2017 will mark a change...
2017 will mark the end of EU production quotas and the WTO’s export limit.
The minimum guaranteed price and the distinction between sugar sold for
food and non-food uses will also be removed. The tariff rate quota, which
limits imports into the EU at low duty, will remain in place.
...bringing more sugar to the world market
The end of the quota will allow sugar producers in the EU to produce without
constraint for export on the world market. This means that when world market
prices are high, more EU sugar is likely to be exported, and when low, supply
may exceed demand. As a result the EU and world sugar prices may be better
aligned in the future. EU producers are likely to face increasing competitive
and margin pressures without the protection around EU pricing.
But the effect may be mitigated by existing tariffs and the EU’s production
flexibility
However, we believe the remaining tariff will still act as a safeguard to EU
sugar prices. Tariffs, which work by pushing up the price of imports, still have
the ability to shield sugar producers in the EU from the full competitiveness of
the global markets. In addition, the EU may bring stability to world prices as
the region operates on a more flexible cycle. The region primarily produces
beet sugar, which has a production cycle of 1 year. This is significantly shorter
than the 4 years required for cane sugar and will enable producers to alter
production according to market conditions.
Deregulation will mean EU sugar volumes will play a greater role in driving
profitability
Volumes are currently largely fixed in the European sugar market because
these regulations fix maximum production and low-duty import levels and the
market operates at these ceilings. When the EU’s forthcoming deregulation
changes this, volumes will become a factor influencing sugar profitability in a
way it has not previously. Volumes are in turn is affected by [1] the volume of
beet/cane grown by farmers (alternative crops, crop productivity, weather), [2]
factory capacity, and [3] refining capability.
The volume of beet/cane that farmers decide to grow will principally be
influenced by how much they are paid. With the removal of quotas, British
Sugar has agreed contract terms for 2017/8. One and three year contacts are
available, with bonus elements linked to the EU sugar price between €475-700
per tonne.
Figure 51: ABF British Sugar purchase agreements from UK beet growers
ABF's financial year impacted Sep-14 Sep-15 Sep-16 Sep-17 Sep-18
Contract offer year/campaign 2013/14 2014/15 2015/16 2016/17 2017/18
When agreed/announced Jun-12 Jun-13 Jul-14 Jun-15 Jul-16
For beet planted/harvested: Mar/Sep 13 Mar/Sep 14 Mar/Sep 15 Mar/Sep 16 Mar/Sep 17
Growers' selling price to ABF (£/tonne)* 26.51 31.67 24.00 20.30 **22.00 Source: National Farmers Union, British Sugar, Deutsche Bank * Applies to both Contract Tonnage (CTE) and Industrial Tonnage (ICE) beet price, except for 2013/4 contract price when ICE was £25.51. Price for surplus beet varies ** Following EU quota removal one and three year contracts are offered. Both set at £22 based on sugar price of €475, with sliding scale up to €700
Description of ABF’s Sugar division
The business processes sugar in Europe, China and Southern Africa .
AB Sugar processes sugar beet (45%) and sugar cane (55%) on three
continents. This is then sold on the international markets, with the majority
29 July 2016
Consumer Staples
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Deutsche Bank AG/London Page 29
sold as industrial sugar for food manufacturing and bio-ethanol production. Its
production is also used in ABF’s consumer facing brand Silver Spoon, which
sits in the Grocery division. The company has 34 production plants and has
operations in the UK, Spain, China and Southern Africa.
In Figure 52 we summarise the structure of the business. British Sugar,
Azucarera, AB Sugar China and Illovo are subsidiaries of AB Sugar that
produce sugar. ABF acquired a 51% stake in the Southern African business
Illovo in 2006 for £317m and since then has fully consolidated its results.
Hence Sugar has, arguable, been slightly inflated in importance in the sales
and profit mixes we have been showing. In any case, in 2016 ABF and Illovo
shareholders agreed the acquisition of the remaining 49% for 25 Rand per
share or £245m.
Figure 52: Sugar breakdown
Region Subsidiary name Beet/cane Input Priced in:
UK British Sugar Beet Mostly* sourced from independent growers Euros
Spain Azucarera Beet and cane Sourced from independent growers Euros
China AB Sugar China Beet and cane Sourced from independent growers Yuan and various other currencies
Southern Africa**
Illovo Cane Sourced from own agricultural operations and independent growers*
African currencies for domestic African sales
Euros and Dollars for exports to Europe and US respectively
Source: Deutsche Bank, company websites * Agreed to reduce the area of beet it grows in the UK by 50% in 2015 ** South Africa and around 40% of other Southern Africa production sourced from independent growers. ABF’s area under cane at end of FY Sep-15 was 69,944 hectares (around half in Malawi & Zambia, and the rest in South Africa, Swaziland, Tanzania and Mozambique).
Figure 53 and Figure 54 show the breakdown of sugar production by tonnes in
2015 and then comparing the change in production mix over time. Illovo
remains the group’s largest sugar producer, though the UK and Spain have
grown their share of production. This is partly a result of a shift towards
activity in more profitable regions.
Figure 53: Illovo is ABF’s biggest producer of sugar Figure 54: ...and while it has remained the largest
producer, production in the UK has caught up
1,640
1,450
709
413
0
300
600
900
1,200
1,500
1,800
Illovo UK Spain (Azucarera) China
ABF's sugar production (tonnes, FY Sept 15)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2010 2015
Mix of ABF sugar production (in tonnes)
China
Spain
UK
Illovo
Source: Company data
Source: Company data
The revenue and profit breakdown by division is heavily impacted by sugar
prices and this is a reason why production volumes are a more reliable
indicator of the relative importance of regions. Nevertheless we estimate the
divisional breakdown in Figure 55 and Figure 56 using Illovo public accounts
and comparisons to peers. We estimate that Illovo and British Sugar were the
largest contributors to revenue, together generating over 60%. However, Illovo
29 July 2016
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Page 30 Deutsche Bank AG/London
was the only significant profit generating unit in 2015, contributing c. £70m to
a division that reported £43m EBIT. This implies that the division’s profits were
mainly because Illovo’s results are fully consolidated.
Figure 55: Revenues in 2015 were divided evenly
between the operating divisions...
Figure 56: ...but we estimate that in 2015 Illovo
generated the majority of profits
Illovo
36%
British Sugar
25%
Azucarera
18%
China
14%
Vivergo
7%
2015 Sugar Revenue split
70
1
-18
-10
43
-30
-20
-10
0
10
20
30
40
50
60
70
80
Illovo Azucarera British Sugar and
Vivergo Fuels
China Total EBIT
2015 Sugar EBIT split, £m
Source: Deutsche Bank estimates
Source: Deutsche Bank estimates; Illovo fully consolidated, and Vivergo Fuels was 47% JV, booked as a share of net income, until stake was raised to 94% in May 2015
... and Vivergo Fuels produces bioethanol
In addition to producing sugar, the company also generates power to meet AB
Sugar’s needs. They export any surplus power to the local national grid. AB
Sugar also has a 94% shareholding in Vivergo Fuels, a wheat-fed bioethanol
production facility in Saltend, Hull, that ferments sugar to produce alcohol.
This is used to make unleaded petrol and its by-product used in animal feed.
Management has said that it expects to run this business at a small loss in the
short term as the European bioethanol market is weaker than expected. Other
operations include seed technology and supplying raw sugar to European
sugar refineries.
Illovo is the Southern African business that grows and produces sugar, and
sells the by-products of the sugar production process
Illovo itself is the parent company of a host of subsidiaries, and we summarise
the group structure in Figure 57. The acquisition of Illovo does not impact the
proportional ownership Illovo’s subsidiary holdings. Illovo currently has
operations in South Africa, Mozambique, Zambia, Malawi, Swaziland and
Tanzania. While South Africa generates c.35% of Illovo’s revenues, it only
generates 13% of Illovo’s EBIT. Indeed, Zambia and Malawi are the most
profitable regions, combined accounting for over 70% of profits.
Figure 57: ABF has increased its stake in Illovo South Africa from 51% to
100% in 2016, though minorities remain in its subsidiaries
Region Company Stake
South Africa Illovo Sugar South Africa Limited 100%*
Mozambique Maragra Acucar SA 90%
Zambia Zambia Sugar Plc 82%
Malawi Illovo Sugar (Malawi) Limited 76%
Swaziland Ubombo Sugar Limited 60%
Tanzania Kilombero Sugar Company Limited 55% Source: Company data * acquisition completed in June 2016
29 July 2016
Consumer Staples
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Deutsche Bank AG/London Page 31
Illovo dates back to 1891 as a public company named Reynolds Brothers. It
was renamed to Illovo in 1994 and management built up the business by
acquiring sugar companies with operations in Southern Africa. Illovo primarily
produces sugar, and this activity accounts for 70% of the business’s revenues
and profits.
Figure 58: South Africa accounts for 35% of Illovo’s
revenues...
Figure 59: ...but only accounts of 8% of EBIT. Zambia
and Malawi are the most profitable regions at Illovo
SA
35%
Zambia
22%
Malawi
19%
Swaziland
11%
Tanzania
10%
Mozambique
3%
Illovo - Revenue split by region (FY Mar-16)
488454
230
134120
-16
-100
0
100
200
300
400
500
600
Zambia Malawi Tanzania Swaziland SA Mozambique
Illovo - EBIT split by region (Rand m, FY Mar 16)
Source: Company data
Source: Company data
It has 16 manufacturing plants and the company supplies sugar to Africa, the
EU and the USA. In addition to brown and refined sugar, Illovo also produces
syrups and specialty sugars, which are sold domestically and abroad. Unlike its
European counterparts, it grows cane sugar as well as sourcing it from
independent growers. This accounts for 19% of group revenues.
The remaining business is ‘Downstream and co-generation’, which is the
production and sale of the by-products of sugar production. This includes
ethanol, agricultural products (e.g. soil improvers), flavourants and electricity.
In fact Illovo is the sole supplier of electricity for its operations in Swaziland
and it exports surplus electricity to the power grid. Downstream &
cogeneration is a high margin business that accounts for 10% of revenues but
24% of Illovo’s EBIT.
Figure 60: c.70% of Illovo’s revenues come from sugar
production...
Figure 61: ...and c.60% of EBIT comes from sugar
production
Sugar production
71%
Cane growing
19%
Downstream and
co-generation
10%
Illovo - Revenue split by operation (FY Mar-16)
Sugar production
59%Cane growing
17%
Downstream and
co-generation
24%
Illovo - EBIT split by operation (FY Mar-16)
Source: Company data
Source: Company data
29 July 2016
Consumer Staples
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Page 32 Deutsche Bank AG/London
Track record and performance
The division has enjoyed sweeter moments .
AB Sugar grew its sales and adj. EBIT significantly during the period 2005 to
2012, achieving a CAGR in adj. EBIT of 8%. This was due to international
expansion, high sugar prices and improvements to both agricultural and
production efficiency. At its peak in 2012, Sugar generated profits of over
£500m and accounted for 46% of group adj. EBIT before central costs.
...but has been more recently impacted by declining sugar prices
Conditions rapidly deteriorated after 2012, however, dragging margins down
to only 2%. This was primarily a result of weak sugar prices from high sugar
supplies in the EU (a relationship that is closely linked, as shown in Figure 63);
however in 2014 the company also cited lower volumes and adverse currency
movements. In 2015, as discussed earlier, the company booked two non-cash
charges below divisional adjusted profits. The first of these was a charge of
£98m to impair the group’s shareholder loans to Vivergo Fuels following the
decline in the price of fuel biofuel. The second was a £100m charge for the
closure of its Northern China factories in Heilongjiang Province, at Yi’an and
BoCheng.
Figure 62: Sales and adj. EBIT have rapidly deteriorated
since 2013
Figure 63: Adj. EBIT closely follows the price of sugar
700671
1,1511,267
1,475
1,941
2,134
2,666 2,677
2,083
1,818
0
100
200
300
400
500
600
0
500
1,000
1,500
2,000
2,500
3,000
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Sugar Sales £m (LHS)
Sugar adj. EBIT £m (RHS)
0
100
200
300
400
500
600
10
12
14
16
18
20
22
24
26
Jan-1
2
Mar-
12
May-1
2
Jul-12
Sep-1
2
Nov-1
2
Jan-1
3
Mar-
13
May-1
3
Jul-13
Sep-1
3
Nov-1
3
Jan-1
4
Mar-
14
May-1
4
Jul-14
Sep-1
4
Nov-1
4
Jan-1
5
Mar-
15
May-1
5
Jul-15
Sep-1
5
Nov-1
5
Jan-1
6
Mar-
16
World sugar price vs AB Sugar EBIT
New York no. 11 (US cent/lb, LHS) EBIT (£m, RHS)
Source: Company data, Deutsche Bank
Source: Company data, Thomson Reuters Datastreams We use full year AB Sugar division’s adjusted EBIT, which has been reported to September 2015
Currency
Revenues from the sugar business are affected by currency movements. Below
we outline the key rates:
EUR/GBP as sugar produced from British Sugar and Azucarera are
both priced in Euros and proceeds are converted to British pounds.
Euro strength therefore is positive due to translational effects;
EUR/ZAR and USD/ZAR as sugar exported by Illovo is priced in Euros
and US Dollars and proceeds converted to South African Rand. In turn
this is then reported in sterling in the ABF accounts;
The majority of the sugar produced from Illovo is sold domestically,
with key currencies being the Malawian Kwacha, Tanzanian Shilling
and Mozambique Metical.
29 July 2016
Consumer Staples
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Deutsche Bank AG/London Page 33
Market share and competitive landscape
Due to the volatility of sugar prices, and their impact on the results of sugar
producers, a market share by volume of sugar produced is the widely used
measure of relative market size. Suedzucker discloses its estimates of the EU
market shares, which we present in Figure 64. Combining British Sugar (11%)
and Azucarera (5%), we estimate that AB Sugar holds a 16% share of the EU
sugar market. This makes it the number 3 player.
Figure 64: British sugar has a 11% share of the EU sugar market, according to
market leader Suedzucker
Suedzucker Group
24%
Nordzucker
15%
Tereos
11%
British Sugar
11%
Azucarera
5%
Pfeifer & Langen
8%
Cristal Union
8%
Royal Cosun
7%
Others
11%
EU sugar market share by volume, 2015/16
Source: Suedzucker, Deutsche Bank
Strategy and the future
A focus on reducing costs...
Weak global and EU sugar prices have driven down ABF’s operating margins
in recent years. In response to this and also in preparation of EU changes in
2017, the company has been implementing efficiency measures to drive down
costs.
In particular over the last 2 years it has been reducing overheads, such as its
factory closures in northern China, in order to focus on operations in more
profitable regions. Azucarera has improved efficiency by storing sugar in “big-
bags” in warehouses close to customers as opposed to in factory silos. By
reducing the distance to the end user and improving order fulfilment and
delivery times, the company indicates it has made substantial savings.
... and ensuring capacity for increased volumes
Once the EU rule changes come into force in 2017 the market is likely to
become more volatile. Sugar companies and companies producing calorific
sweeteners will be free to increase production, thereby increasing supplies.
World and EU prices are likely to be more closely aligned. This will increase the
need for EU processors to continue to improve their competiveness. There may
be consolidation in the market as a result. The willingness of farmers to grow
beet sugar (rather than alternative crops) will also be a determinant in where
prices settle.
29 July 2016
Consumer Staples
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Page 34 Deutsche Bank AG/London
Agriculture
Agriculture division in the group context
Agriculture is a small division that specialises in animal feeds. Until 2010 it was
disclosed as Sugar & Agriculture. It contributed only 9% to group revenues in
2015 and 5% to group adj. EBIT, and these proportions have been stable over
time.
Figure 65: Agriculture has consistently contributed
c.10% to sales...
Figure 66: ...and c.5% to adj. EBIT*
13%
10%
9%
11%
10%
9%
10%
10%
11%
10%
9%
87%
90%
91%
89%
90%
91%
90%
90%
89%
90%
91%
0%
25%
50%
75%
100%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Agriculture as a % of salesAgriculture Other
3%
3%
3% 5%
5%
3%
4%
4%
4%
4% 5%
97%
97%
97%
95%
95%
97%
96%
96%
96%
96%
95%
0%
25%
50%
75%
100%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Agriculture as a % of adj. EBIT
Agriculture Other
Source: Company data, Deutsche Bank
Source: Company data, Deutsche Bank; * adj. EBIT before central costs
An introduction to the animal feeds industry
Demand driven by population changes
The use of nutritional animal feed is beneficial to livestock farmers as it
shortens the time it takes to get meat to market. The additional nutrients,
minerals and enzymes in animal feed work to accelerate weight gain for
animals as well as supplying them with nutrients. Demand for animal feeds is a
reflection of consumer demand for meat. This looks set to increase with a
growing and wealthier global population. In addition, demand for feeds is
affected by the outbreak of disease and weather conditions.
The profitability of the business will in turn depend on the cost of protein and
energy, including commodity prices, the efficiency of feed mills, and the level
of R&D required to maintain competitiveness. Legislation on feeds is
harmonised at an EU level.
Description of ABF’s Agriculture division
AB Agri started in 1985 as an attempt by British Sugar to manage the leftover
waste pulp from sugar beet processing. This pulp became the basis of
nutritious animal feed. It was acquired by ABF in 1991. Today AB Agri is
primarily a supplier of animal feed and animal feed ingredients. It also has
operations in grain trading and providing consultancy services to the
agricultural industry. It operates in over 70 countries and is split into 6 units:
29 July 2016
Consumer Staples
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Deutsche Bank AG/London Page 35
AB Vista: the international animal feeds business. We estimate this is
the largest contributor to the division. It was started in 2005 and
focuses on developing technology and supplying feed enzymes and
other ingredients for use in animal feeds.
Speciality Nutrition: the business supplies premixes, starter feed and
micro-ingredients (e.g. vitamins and minerals) to manufacturers of
animal feeds. It was previously named Premier Nutrition.
AB Agri China: supplies animal feeds to manufacturers, farms and
food processors in China. It is specialised in the ruminant, pig and
poultry sectors and has a manufacturing plant in China.
AB Connect: with operations solely in the UK, it manufactures animal
feeds and supplies the food, drink and bioethanol industries.
Frontier Agriculture: a joint venture with Cargill in which ABF owns
50%. It trades grain, sells fertiliser and crop protection products and
provides agronomic advisory services in the UK. Its revenues are not
consolidated by ABF but were £1.5bn in 2015. ABF consolidates 50%
of the JV’s net income and we believe this to be one of the more
profitable activities within the division.
AB Sustain: delivers product solutions in the agriculture supply chain.
Quantum blue has driven AB Vista
A product called Quantum Blue, developed by AB Vista, has been the success
story at AB Vista since 2012. In technical terms, it is a phytase used in animal
feeds to bind nutrients to indigestible phytates. More simply, Quantum Blue is
used in animal feeds to release vital nutrients into animals’ digestive systems.
The product has been extremely successful and has seen growing sales and
profits.
Track record and performance
In 2007, the agricultural business acquired two companies: Premier Nutrition
(later renamed to Specialty Nutrition) and Primary Diets, in line with its strategy
to acquire complementary businesses. These acquisitions increased revenues
but the division has seen declining revenues since 2013 driven by lower wheat
and other commodity prices. Despite this, the business has increased
profitability, largely due to Quantum Blue’s strong performance. This has
supported EBIT margins, increasing to 5% in 2015 albeit below group margins
of 8.5%.
29 July 2016
Consumer Staples
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Page 36 Deutsche Bank AG/London
Figure 67: Agriculture revenues have been depressed by
soft commodity prices ...
Figure 68: ... but adj. EBIT has been driven by the
success of Quantum Blue
735
623 645
867913
954
1,127
1,265
1,410
1,312
1,211
0
200
400
600
800
1,000
1,200
1,400
1,600
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Agriculture Sales £m
20
1518
33 34 33
40 40
4750
60
0%
1%
2%
3%
4%
5%
6%
0
10
20
30
40
50
60
70
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Agriculture adj. EBIT £m Agriculture adj EBIT margin %
Source: Company data, Deutsche Bank
Source: Company data, Deutsche Bank
Market share and competitive landscape
It is difficult to estimate the size of the animal feed market. In 2012, ABF
estimated the global phytase market to be “north of 250m” and forecast
growth of 7-8% a year. This would mean the market was worth between £300-
315m in 2015. We do not have data on market shares in animal feeds however
the company has said that 1 in 5 chickens worldwide contain a product made
by AB Vista. Its key competitors in the feed enzymes industry are DSM,
DuPont and BASF.
Strategy and the future
AB Agri’s strategy involves both organic growth and complementary
acquisitions. The division aims to make agri-food production more efficient by
working in partnership with customers. Investing in product innovation is
important to maintain its competitiveness.
29 July 2016
Consumer Staples
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Deutsche Bank AG/London Page 37
Ingredients
Ingredients division in the group context
Ingredients is a small division with mid single-digit margins. It has been
through some restructuring in recent years but has historically been a cash
generator for other more capital hungry divisions.
Figure 69: Ingredients have remained 10% of sales... Figure 70:...while it is 7% of group adj. EBIT*
10%
11%
10%
10%
11%
10%
10%
9%
10%
10%
10%
90%
89%
90%
90%
89%
90%
90%
91%
90%
90%
90%
0%
25%
50%
75%
100%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Ingredients as a % of salesIngredients Other
11%
14%
11%
11%
12%
11%
6%
2%
0% 3% 7%
89%
86%
89%
89%
88%
89%
94%
98%
100%
97%
93%
0%
25%
50%
75%
100%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Ingredients as a % of adj. EBIT
Ingredients Other
Source: Company data, Deutsche Bank
Source: Company data, Deutsche Bank; * adj. EBIT before central costs
An introduction to the ingredients industry
Ingredients, as the name suggests, are vital inputs in the production of food,
however they represent a low proportion of the final value of food products.
The industry is characterised by a wide range of subsectors which in turn
command different levels of profitability. We estimate that the profit margins
of enzymes and cultures are higher than those of colours and texturants (an
ingredient that affects the texture of a product).
Bakery ingredients form the main part of ABF’s Ingredients business, and
these include enzymes and emulsifiers (a texturant). We identify three main
drivers of the bakery ingredients industry.
The demand for these inputs is driven by product innovation and
expenditure on Research & Development.
The need for product innovation is in turn driven by regulation and
shifts in consumer taste. For example, the trend towards consumption
of healthier products, combined with increased regulation of the food
industry has driven companies to meet changing demands.
The demand for the end product i.e. bakery products and alcohol
29 July 2016
Consumer Staples
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Page 38 Deutsche Bank AG/London
Description of ABF’s Ingredients division
The Ingredients division is a manufacturing business that produces bakery
ingredients (including yeast), enzymes, proteins, lipids and cereal specialities.
These are sold to food and non-food producers.
Approximately 80% of AB Ingredients’ revenues come from its subsidiary AB
Mauri (Figure 71). This estimate is based on the disclosure on AB Mauri’s
website that its sales in 2015 were $1.6bn. AB Mauri is the international yeast
and bakery division that supplies bakers, and is used for foodservice and
wholesale purposes. It has a wide reach, with plants in 26 countries (AB Mauri
in 21 and Specialty Ingredients in 4 European markets plus the USA) and sales
in more than 90 countries. AB Mauri sells all ingredients used in industrial
baking, for example dough conditioner, a product that can improve the baking
process from affecting the crumb texture to changing the fermentation
tolerance. Other main products also include bread improvers and bakery
mixes.
The Specialty Ingredients segment is a significantly smaller part of the
business, generating c.20% of the division’s revenues. It is comprised of AB
enzymes, Ohly, SPI Pharma, ABITEC Corporation and PGP International. Figure
73 summarises the breakdown.
Figure 73: AB Ingredients breakdown
Company Operations
AB Mauri Yeast and bakery ingredients
AB enzymes Enzymes for baking, food, animal feed, textile, pulp and paper
Ohly Yeast extracts, yeast based flavours and speciality powders
SPI Pharma Supplies pharmaceutical industry
ABITEC Corporation Ingredients for toll manufacturing, pharmaceutical uses, nutritional sciences, speciality chemicals and personal care and cosmetics
PGP international Supplies and manufactures cereal food ingredients Source: Deutsche Bank
Figure 71: AB Mauri is the main business, generating
over 80% of revenues
Figure 72: We estimate the group holds a 5% share in
the bio-ingredients market
AB Mauri
83%
Specialty
Ingredients
17%
Ingredients revenue breakdown 2015
DSM
16%
DuPont Danisco
13%
Chr. Hansen
11%
Novozymes
10%BioSpringer
6%
ABF
5%
Kerry Group
5%
Cargill
2%
Others
32%
Bio-ingredients market, 2015
Source: Deutsche Bank, company websites
Source: Deutsche Bank estimates, company data
29 July 2016
Consumer Staples
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Deutsche Bank AG/London Page 39
Track record and performance
Squeezed margins during 2011-2013
Ingredients is a mature, small part of ABF. The division’s profits however have
been volatile this decade. It saw significant declines in adj. EBIT from 2011 to
2013 (Figure 75), impacted by high raw material costs such as molasses. 2013
was also impacted by a £21m rationalisation charge for the closure of a dry
yeast production in Italy and a £5m accelerated depreciation charge in China.
Figure 74: Rising revenues... Figure 75:...mask volatile EBIT
583
683 698
824
9891,067 1,090 1,067
1,360
1,261 1,247
0
200
400
600
800
1,000
1,200
1,400
1,600
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Ingredients revenues £m
65
79
71
78
88
104
61
27
5
41
76
0%
2%
4%
6%
8%
10%
12%
14%
0
20
40
60
80
100
120
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Ingredients adj. EBIT £m Ingredients adj. EBIT margin %
Source: Company data, Deutsche Bank; Sales increase in 2013 reflects in part the transfer into the division of a flour milling business of George Weston Foods which was previously reported in Grocery (representing sales of £272m and Adj. EBIT of £4m)
Source: Company data, Deutsche Bank
Recovery through cost reductions
2013 marked trough profits for the business. It also marked the first year of a
new divisional management team. New management successfully initiated a
turnaround and the business saw a profit recovery in 2014 and 2015 through a
series of cost reductions, restructuring in Europe and China and the acquisition
of a bakery business in Western Europe. The Speciality Ingredients business,
while small, also contributed to the recovery in 2015, with strong growth in
yeast extracts and speciality powders.
Market share and competitive landscape
The ingredients division is a small business not only within ABF, but within the
industry. Overall, we estimate that AB Ingredients has a 5% share of the bio
ingredients industry. The industry is defined by DSM, a company specialised in
the production of health, nutrition and materials, as ‘specialty products based
on fermentation processes’ and includes products such as yeast extracts,
cultures and food enzymes.
Strategy and the future
Investing to grow in an already concentrated market
As shown in Figure 72, we estimate that the market is dominated by 4 players
who together hold 50% of the market. Yeasts are the main product of the
division and since yeast is a relatively small input cost for a baker, quality and
consistency of performance are more important than price. Hence ABF aims to
achieve growth through a high level of investment in technology, innovation
and research & development.
The wider market of human nutrition is currently seeing volume growth of 5%
and flat pricing and our chemicals analysts believe this trend is likely to
continue.
29 July 2016
Consumer Staples
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Page 40 Deutsche Bank AG/London
Retail
Retail division in the group context
The largest division by sales and profits
The Retail division has been steadily rising as a proportion of group sales and
profits. We refer to it interchangeably with Primark, albeit it trades under the
name of Penneys in Ireland, since it is the sole business within Retail and has
been since the management buyout of Allied Glass Containers in 2002.
Figure 76: Retail contributes for c.40% of group sales... Figure 77: ...and c.60% of group adj. EBIT*
18%
22%
24%
23%
25%
27%
28%
29%
32%
38%
42%
82%
78%
76%
77%
75%
73%
72%
71%
68%
62%
58%
0%
25%
50%
75%
100%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Retail as a % of salesRetail Other
24% 32%
31%
34%
34%
36%
32%
32% 42% 5
5%
59%
76% 68%
69%
66%
66%
64%
68%
68% 58% 4
5%
41%
0%
25%
50%
75%
100%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Retail as a % of adj. EBITRetail Other
Source: Company data, Deutsche Bank
Source: Company data, Deutsche Bank; * adj. EBIT before central costs
Description of ABF’s Retail division
A Primark primer: a long history with a stable management team
Penneys was founded in Ireland in 1969 and trades as Primark in all of its other
markets. Arthur Ryan, who founded the business and was CEO until 2009, is
Chairman of the company. Paul Marchant took over as CEO in 2009, joining
from New Look where he was latterly COO. It is predominantly a European
value fashion retailer of its own private label garments selling from large-sized
stores on high streets and in shopping malls. Its ranges also include footwear,
accessories, homewares and beauty. It does not disclose its category sales mix
but we would estimate, based on Kantar Worldpanel data, that the mix is
c.54% womens, c.20% mens, c.17% childrenswear and c.10%
homewares/beauty. Primark expanded beyond the British Isles for the first time
in 2006, entering Spain, and beyond Europe in 2015 when it entered the USA.
A big brand internationalising rapidly.
Primark generated £5.3bn sales from 293 stores and 11.15m sq ft in FY Sep-
15. The division does not report sales or profits by country (only store numbers
and square footage). From UK subsidiary accounts we can, however, estimate
the sales contribution from the UK and hence derive the aggregate other
countries.
The UK is undoubtedly Primark’s largest market, accounting for an estimated
c.55% of the division’s sales and profits. The remaining sales and profits are in
Europe and in Euros. We estimate profits in Spain now exceed those in Ireland
and estimate Spain is the highest margin country for Primark.
29 July 2016
Consumer Staples
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Deutsche Bank AG/London Page 41
Figure 78: We estimate c.55% of Primark revenues were
from the UK in 2015...
Figure 79: ...and that the UK also represents c.55% of
adj. EBIT
UK
54%
Spain
15%
Germany
10%
Ireland
9%
Netherlands
4%
Portugal
3%
France
2%
Austria
2%Belgium
1%
Retail Sales mix by country 2015
UK
57%
Spain
17%
Ireland
9%
Other
17%
Retail adj. EBIT geographic split, 2015
Source: Deutsche Bank estimates based on Primark Stores Ltd accounts
Source: Deutsche Bank estimates
We show a snapshot of Primark’s operations across its 11 markets in Figure
80.
Figure 80: Primark snapshot FY Sep-15
Year of No of stores Sq ft 000s Ave. store size Sales Sales per ave. Sales per ave.
Country entry* Year End * Year End * sq ft at YE * £m sq ft £ store £m
Ireland 1969 36 1,028 28,556 464 450 12.7
UK 1973 164 6,083 37,091 2,891 477 17.6
Spain 2006 40 1,369 34,225 812 600 20.3
Netherlands 2008 12 547 45,583 252 564 25.2
Portugal 2009 8 267 33,375 141 564 18.8
Germany 2009 19 1,194 62,842 506 500 31.6
Belgium 2010 4 166 41,500 56 564 22.6
Austria 2012 4 193 48,250 95 564 27.0
France 2013 5 231 46,200 130 564 26.1
USA 2015 1 77 77,000 **NA **NA **NA
Italy*** 2016 0 0 0 0 na 0.0
Total 293 11,155 38,072 5,347 500 18.7
Source: Deutsche Bank estimates except * company data; ** opened two days before year end, *** launched in 2016 Estimates based on the assumption that smaller markets have identical sales densities
The business model: a disruptive value retailer
In our view the value proposition of any retailer can be assessed qualitatively
through five areas, all of which help to define the brand. These are price,
range, quality, convenience and service. The attributes on which Primark
scores highly are price and fashion. This is shown in our 2016 UK consumer
survey results (Figure 82).
29 July 2016
Consumer Staples
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Page 42 Deutsche Bank AG/London
Figure 81: The value proposition of a retailer Figure 82: Shoppers perceive Primark to be strong on
price and fashion, though weaker on most other aspects
Range(width,
depth)
Convenience(Store location, layout,
Online delivery etc)
Service
(store, online)
Price
Supply Chain
Central functions
how differentiated is the “Value
Proposition” ?
How is this trending relative to
the competition?
How sustainable is this
positioning?
How agile/ flexible is the
business model?
How good is management at
executing this proposition?
BRAND
(awareness; perception vs
reality; momentum; reliability;
exclusivity)
Quality(level, consistency)
0
2
4
6
8
10Price
Fashion
Quality
Range
Ethics
Shop environment
Website
Delivery
Primark score vs benchmark
Benchmark
Primark
Source: Deutsche Bank
Source: Research Now®, Deutsche Bank; consumer survey of 1,000 female British consumers aged 18-75, April 2016. Scores out of 10 on different attributes. Benchmark refers to how important eight different attributes were to consumers making their clothing & footwear purchase decisions.
Evidence of Primark’s strength in fashion perception can perhaps also be
inferred from Kantar Worldpanel data. This shows its greatest share gains have
been in younger age groups. Our 2016 UK consumer survey showed around
half of under 34 year old women said they shopped at Primark frequently
(every three months or more often). This was higher than ASOS (26%) and
slightly higher than New Look (45%).
Figure 83: Primark’s highest market shares are in
younger age groups ...
Figure 84: ... where shopping frequency is high
0
5
10
15
< 20 20 - 24 25 - 34 35 - 44 45 - 54 55 - 74
Primark: Womenswear (inc shoes) market share by age %
2008 2014
53%
49%
44%
26%
16%
12%
39%
41%
37%
45%
49%
41%
8%
10%
19%
29%
36%
48%
0% 20% 40% 60% 80% 100%
18-24
25-34
35-44
45-54
55-64
65-75
Primark: breakdown by age and frequency
Frequent Infrequent Non -shopper
Source: Kantar WorldPanel
Source: Research Now®, Deutsche Bank Base N = 1003 (all)
Primark tries to change the perception of value in the market in which it
operates, employing a predominantly ‘every-day low price’ strategy. It aims to
be the lowest price in its markets, which is why value fashion is often called
‘disposable’ fashion. Primark does not disclose its gross margin (it deems this
commercially sensitive) but we believe these are in the mid-40s and therefore
around 1000bps below mid-market peers. A common question is how Primark
can sell at such low prices (we estimate, based on Kantar Worldpanel data,
that the average is £3.50 per item excluding VAT). We think this can be
answered, and its competitive advantages can be seen, from Figure 85. This
shows that Primark makes less than half of the profit from selling 100 units
that H&M makes (even after the 860bps decline in H&M’s EBIT margins
between its peak of 23.5% in FY Nov-07 to the 14.9% achieved in FY Nov-15).
29 July 2016
Consumer Staples
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Deutsche Bank AG/London Page 43
Figure 85: From 100 units, Primark makes half the profit as H&M
Primark H&M
Volumes 100 100
Average Selling Price £ (ex-VAT) 3.50 8.00
Sales £ 350 800
Gross margin % 44.6% 57.0%
Gross profit £ 156 456
Operating costs -112 -337
Cost as % sales 32.1% 42.1%
EBIT £ 44 119
EBIT margin % 12.6% 14.9%
Fully leased
Operating costs -117 -337
Cost as % sales 33.4% 42.1%
EBIT fully leased £ 39 119
EBIT margin fully leased % 11.2% 14.9%
Source: Deutsche Bank estimates, Primark FY Sep15 and H&M FY Nov-15
Volume, volume, volume
Primark achieves an attractive return, much like the hard discounters in Food
Retail or the general merchandise discounters, by buying large volumes from
suppliers and selling at a low price to generate high sales per square foot.
Large stores also keep cost densities down and also help to attract customers
more frequently and to buy more items. Primark, like Zara, is visited
significantly more frequently than a typical clothing retailer, which must in part
be attributable to its regular new fashion arrivals. The average basket of 4
items is higher than Zara (just under 3) and the market average of around 2.5
units per basket. The virtuous circle of large stores, low gross margins, low
prices, high volume, high densities and acceptable margins is hard to replicate.
We think that the business model can best be illustrated by comparing Primark
on these metrics against a wider set of its peers.
Figure 86: A large average store size ... Figure 87: ... and low gross margins ...
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
Debenhams Primark M & S (Clothing &
Home)
H & M brand Next Zara New Look
Average store size (sq ft 000s)
30%
35%
40%
45%
50%
55%
60%
Next Inditex H & M M & S (Clothing &
Home)
New Look Debenhams Primark
Gross margin %
Source: Deutsche Bank, company data Note: Average store size during 2015/6 financial year
Source: Deutsche Bank, company data Note: 2015/6 financial year. Next, Primark and Debenhams gross margins not disclosed. We estimate Debenhams’ gross margins for own-bought clothing & home (ie excluding concessions) to be 52%
29 July 2016
Consumer Staples
A B Foods
Page 44 Deutsche Bank AG/London
Figure 88: ... enables competitive pricing ... Figure 89: ... which drives significant volumes ...
£15
£9 £8 £8 £7
£45
£48
£40
£35
£19
£0
£10
£20
£30
£40
£50
£60
M&S Next H&M New Look Primark
Women's Jeans*: Full retail price inc. VATMedian
0
200
400
600
800
1,000
1,200
1,400
1,600
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Number of units sold (m)
Primark Inditex
Source: Deutsche Bank, Company websites and stores Note: June 2016 pricing survey;* Next own brand only, chart excludes an outlier at M&S priced at £89.
Source: Deutsche Bank estimates, Inditex Note: 2015 = FY Jan-16 Inditex and FY Sep-15 Primark. Assume average selling price of £4 throughout for Primark. We estimate that H&M sold c.1,760m units in FY Nov-15
Figure 90: ... at high sales densities ... Figure 91: ... and a low cost to sales ratio ...
0
100
200
300
400
500
600
Next Primark Zara M & S (Clothing &
Home)
New Look H & M Debenhams
Sales per square foot (£)
Sales per sq ft (£) Sales per sq ft excluding e-commerce (£)
20%
25%
30%
35%
40%
45%
50%
Primark Debenhams Next Inditex New Look H & M M & S (Clothing &
Home)
Operating costs to sales %
Source: Deutsche Bank, company data Note: 2015/6 financial year translated at average currency rates
Source: Deutsche Bank, company data Note: 2015/6 financial year. M&S Clothing & Home implies operating margin of 9.5% (and Food 5.4%)
Figure 92: ... and leads to attractive profit densities ... Figure 93: ... at a solid percentage EBIT margin
0
20
40
60
80
100
120
Next Inditex Primark H & M M & S (Clothing &
Home)
New Look Debenhams
EBIT per sq ft (£)
0%
5%
10%
15%
20%
25%
Next Inditex H & M Primark New Look M & S (Clothing &
Home)
Debenhams
Adj EBIT margin %
Source: Deutsche Bank, company data Note: 2015/6 financial year translated at average currency rates
Source: Deutsche Bank, company data Note: 2015/6 financial year
29 July 2016
Consumer Staples
A B Foods
Deutsche Bank AG/London Page 45
A transactional website does not seem to be likely in the near-term ...
Like some of the discounters in other categories, its high frequency and low
ticket price is hard to replicate but also hard to make profitable online. Hence
Primark does not offer e-commerce, which arguably hinders the attractiveness
of its proposition given that c.15% of European apparel is omnichannel. Indeed
this is a relative disadvantage for Primark’s convenience (Figure 81) since it is
the only retailer in the top 20 of UK apparel not to offer transactional online. Its
website does, however, attract 0.3m customers per week to view products and
share their purchases on social media, and this acts as a further means of
advertising. Having no transactional website also helps to keep the business
simple and low cost.
... but never say never
For a few months in 2013 Primark trialled a limited online offering on Asos. We
suspect that the trial ended because low average transaction values and low
gross margins did not make the offer economic. We estimate that Primark’s
average basket is around £20, or roughly 5 items at £4. This would achieve £9
of gross profit per transaction, so would simply not be attractive without full
cost recovery. This in turn would be difficult to achieve since online leaders
such as Asos offer free delivery and returns. In contrast, Inditex’s average
basket is c.€85 and so its gross profit per transaction is close to c.€50 and
ASOS’s average basket is c.£68 (inc. VAT, pre-returns). However, Primark’s
average transaction may grow over time (in its flagship stores transaction
value averages €30-40) or costs of fulfilment may fall. Management’s view is
pragmatic, that there is more profitable growth elsewhere at present.
The supply chain follows a traditional model ...
Unlike Inditex, which has a competitive advantage in sourcing through a
uniquely different supply chain, Primark’s model is more conventional. Like
most of its competitors it sources a large proportion of its clothes from third
party manufacturers in Asia, where production costs are typically below those
of Europe and the US. Some garments which require a shorter lead time,
typically because they are higher fashion or in-season repeats, are sourced
from Eastern Europe. In 95% of cases these suppliers also manufacture for
Primark’s value and mid-market peers. Indeed Primark does not wish to be
more than 50% of a manufacturer’s orders.
Figure 94:Primark’s sourcing mix is conventional within
European apparel and is approximately 80% USD and
20% EUR
Figure 95: ... with most costs being labour and raw
materials
China50%
Bangladesh15%
Indian subcontinent &
other Asia15%
Turkey & Eastern Europe
20%
Sourcing mix by geography 2015
Cut, Make, Trim Labour30%
Other mfg costs8%
Textile/ Apparel mfg profit
7%Raw materials
11%
Freight5%
Duty8%
Supply chain overheads
8%
Yarn & Textile Manufacturing (labour, energy
etc)23%
Percentage split of cost of goods sold for a typical clothing retailer
Source: Deutsche Bank estimates
Source: Deutsche Bank estimates
29 July 2016
Consumer Staples
A B Foods
Page 46 Deutsche Bank AG/London
Once the design has been sampled production commences and finished goods
are shipped to Primark’s own-operated distribution centres in Europe before
being delivered to store. The process from design concept to store takes
around 6 months on average but for some fashion lines takes as little as 6
weeks. These stages are summarised in Figure 96.
Figure 96: Five stages of the supply chain
Source: Deutsche Bank, company data
... and supply chain capacity has received considerable investment
Warehouse capacity doubled between 2013 and 2015 to meet Primark’s
international expansion plans. Previously, Primark’s stock was shipped to one
of its distribution centres in the UK and then distributed to stores. However,
expansion into Continental Europe and USA has altered this process. There are
now distribution centres in Monchengladbach (Germany), Torija (Spain), Bor
(Czech Republic), Naas (Ireland), Roosendaal (Netherlands, 2017) and a third-
party facility in Bethlehem Pennsylvania (USA). In the UK, Primark has 2 DCs in
Thrapston and Magna Park Lutterworth, with the latter relocating to a larger,
custom built site in Islip in 2016. These warehouses, which include hanging
garment facilities, have advanced warehouse management systems with
technology such as voice picking. The Monchengladbach facility, which
receives by train or barge products which have docked in Rotterdam, opened
in 2012 and reduced time to store by nine days on the continent.
A number of drivers of gross margin
There are many drivers of Primark’s (undisclosed) gross margin but more
simply can be split into intake margin and markdown.
Intake margin, the cost of procurement, is the consequence of many things.
These include volumes purchased, cost of labour, fabric, freight rates,
exchange rates and retail price. To adjust to these pressures a clothing
company can change the location of manufacturing to access lower labour
costs. It can alter garment fabrics and composition to respond to cotton prices
or the oil price’s impact on man-made fibres. Generally the US dollar is the
purchasing currency in Asia, though the cost/benefit of any divergence
between US dollar and local Asian currency can be negotiated between the
retailer and manufacturer (whose costs are largely local).
29 July 2016
Consumer Staples
A B Foods
Deutsche Bank AG/London Page 47
Currency movements do not immediately impact gross margins. Freight
contracts in dollars tend to be set annually. When Primark places an order with
a manufacturer it decides whether it is intended for sale in the UK or in the
Eurozone and fixes a dollar rate into the cost price. It then sells the garment on
average six months later, roughly when it is paying the supplier in dollars
purchased at the fixed cost price. Hence while Primark does not take out
hedging instruments, it is typically hedged for 6 months. A strong Sterling
against the dollar is favourable for Primark for purchasing goods. However
strong sterling against the Euro is unfavourable for translating its continental
profits.
Markdown reflects the promotion and clearance activity of stock below the
original full price. Primark has a clear-as-you-go policy and an everyday low
pricing approach so it is no surprise that its promotional participation is fairly
low by industry standards and has not changed by much over time.
Figure 97: Primark’s sales on discount are significantly
lower than its peers
Figure 98: ...has increased its proportion of sales on
discount but by less than the market ...
11
16
23 2427 27
30 31
3739 39
43 43
52
57
0
10
20
30
40
50
60
Prim
ark
Geo
rge
Next/
Dir
Riv
er
Isla
nd
Mata
lan
New
Lo
ok
Tesco
Mark
s &
Sp
encer
TO
TA
L M
AR
KE
T
Sho
p D
irect
Gro
up
Sain
sb
ury
Cla
rks
TK
Maxx
Bhs
Deb
enham
s
% sales on discount, by value (2015)
-3
0
2 23
56 6
77
89 9 9
10
-4
-2
0
2
4
6
8
10
12
Tesco
Cla
rks
TK
Maxx
Geo
rge
Prim
ark
TO
TA
L M
AR
KE
T
New
Lo
ok
Next/
Dir
Mark
s &
Sp
encer
Bhs
Sho
p D
irect
Gro
up
Riv
er
Isla
nd
De
benham
s
Sain
sb
ury
Mata
lan
% sales on discount, by value: change from 2009
Source: Kantar Worldpanel (52 weeks to August 2015)
Source: Kantar Worldpanel (52 weeks to August 2015 versus 2009)
So what is special about Primark?
Though it operates a conventional model, there are a number of aspects about
the supply chain which are key in achieving the financial results.
First, as we have seen, Primark operates off lower gross margins than its peers
though it may be manufacturing from the same supplier as its competition.
Second, the volumes Primark buys in are significantly larger than most of its
peers, which reinforces the low-cost of production. It has a limited number of
suppliers with whom it has been working for many years (around 90% of
goods purchased come from 250 suppliers). Third, the company has built up
fashion intelligence in recent years through expanding its buying teams in
Dublin (Ireland) and Reading (UK).
Fourth, newness is crucial to fast fashion as consumers want to be able to buy
new trends soon after they appear on the catwalk, and Primark’s model
responds well to new fashions. Stores typically receive at least 5 deliveries
each week and these will include the introduction of around 800 new items
into stores per week. Store managers and category managers can adjust the
number of units they receive through an in-store ordering process depending
on the levels of demand they are seeing and their expectations. To make room
for this newness, Primark has a clear-as-you-go model to deal with product
failures (which are natural in fashion). Typically if new lines are not well
29 July 2016
Consumer Staples
A B Foods
Page 48 Deutsche Bank AG/London
received by customers within two weeks this will have been identified and the
product price will be lowered to clear inventories over the next two weeks.
This frees up shelf space for more productive garments. Store managers have
some price flexibility both to clear product and to compete locally against
peers.
Track record and performance
More stores, larger stores...
Over the last decade Primark has typically been opening larger stores and
enlarging existing stores. Indeed over this time the number of stores has
doubled but space has quadrupled as the average store size has increased
from 20,000 sq ft in 2005 to 38,000 sq ft in 2015. Its largest store is in
Manchester, UK, (155,000 sq ft or 14,400 square metres). The average store
size in its newer continental European markets (43,000 sq ft, FY Sep-15)
significantly exceeds its average size within the UK & Ireland (36,000 sq ft).
Figure 99: Store growth has been rapid ... Figure 100: ... and the average store is getting bigger...
93108 114 116 120 122
143
170181
191204
223
242257
278293
0
50
100
150
200
250
300
350
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Primark store numbers
1516
18 1819
20
24
2830
3132
33
35 3537
38
0
5
10
15
20
25
30
35
40
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Average store size ('000 sq ft)
Source: Company data Note: at year end
Source: Deutsche Bank, company data Note: average during financial year
...driving sales growth...
Unsurprisingly, therefore, sales per store and total revenues have grown
significantly. Its compound annual sales growth was 18% over the 10 year
period (2005-15) and 14% over the 5 year period (2010-15).
Figure 101: ... leading to higher sales per store Figure 102: ... and rapidly growing total revenues
5.15.9
6.57.3
8.3
9.9 10.211.0
12.4
13.814.3
15.1
17.1
18.5 18.7
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Sales per average store (£m)
429 515654 752 858
1,0061,309
1,602
1,933
2,314
2,730
3,043
3,503
4,273
4,950
5,347
0
1,000
2,000
3,000
4,000
5,000
6,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Primark sales (£m)
Source: Deutsche Bank, company data
Source: Company data
29 July 2016
Consumer Staples
A B Foods
Deutsche Bank AG/London Page 49
...and sales densities
More of a surprise, perhaps, is that sales densities have generally risen despite
the increasing store size. More normally in retail, larger stores would imply
lower sales per square foot but commensurately lower costs (e.g. rent/staff)
per square foot. Primark’s performance is explained by the larger (and in many
cases full) offering drawing in greater footfall and thus achieving greater sales
densities. Its large stores often put some of the more productive categories (eg
ladies shoes) on higher floors to drive traffic through the store.
The large catchment areas of these stores have, in certain instances, led to
cannibalisation. In FY Sep-15 the strong store opening programme in the
Netherlands and Germany was a major factor why the overall like for like sales
(LFLs, defined as sales growth of stores which have been trading for 53 weeks
or longer) were +1% while excluding these markets it was +4%. Back in FY
Sep-07 the significant UK store opening programme explained why the overall
LFLs were +1%: excluding cannibalisation these were +7%. Although the
reported LFL record has been modest in some years, LFLs were negative for
the first time in H1 2015/6 (LFLs of -1% or +1% excluding cannibalisation).
Figure 103: Sales densities have grown despite larger
stores ...
Figure 104: ... while space growth has been a bigger
driver than LFL
327346
371390
419444
353383
411
444 442 449
488516
500
0
100
200
300
400
500
600
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Sales per sq ft (£)
27%
21%
17%
13%
12%
8%
14%
16%
13%
12%
8%
3%
1%
4%
7%
6%
3%
3%
5%
4%
1%
0%
5%
10%
15%
20%
25%
30%
35%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E
Primark constant currency sales growth %
New Space contribution Like for like
Source: Deutsche Bank estimates, company data; decline in 2007 reflects the shift to larger average store sizes following Allders & Littlewoods store acquisitions
Source: Company data, Deutsche Bank
UK is growing but is less important in the mix
According to subsidiary accounts, the UK achieved a five year sales CAGR of
8% (2010-15). Nevertheless, the UK has fallen in the sales mix from 73% to
54% over the same period due to the rapid growth in continental Europe.
29 July 2016
Consumer Staples
A B Foods
Page 50 Deutsche Bank AG/London
Figure 105: The UK generates the majority of Primark
sales...
Figure 106: ...but is becoming less important as Primark
expands into Continental Europe and USA
0
1,000
2,000
3,000
4,000
5,000
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Primark sales by geography (£m)
UK Ireland Continental Europe & US
0%
20%
40%
60%
80%
100%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Primark sales mix by geography %
UK Ireland Continental Europe & US
Source: Deutsche Bank estimates, company data
Source: Deutsche Bank estimates, company data
Fairly stable gross margins
Although Primark does not disclose gross margins management does refer
directionally to the movement year on year. From this we can (rather
tentatively) conclude that gross margins have if anything fallen over the past
ten years. The key decision was made in FY Sep-11 when a spike in cotton
prices put pressure on costs of goods sold at the same time as VAT was
increased by the UK government. Management decided that it would sacrifice
some margin to improve its price leadership further. So whilst prices rose, they
rose less than the industry and gross margins fell sharply (we estimate
c.250bps). Profits fell by over 9% as a result, the worst year on record.
And a narrow band of adj. EBIT margins
Adj. EBIT growth has been robust with the exception of 2011, a year that was
impacted by higher cotton prices and increased VAT in the UK. Since then,
earnings and operating margins have benefitted from increased
warehouse/distribution efficiencies and international expansion though
investment levels remain high. Historically, Primark’s margins have fluctuated
between 10% and 14% on a reported basis. As we described earlier (Figure 19)
Primark owns freehold property which gives it a rental ‘shield’. The property
has not been revalued since 2007 but we estimate that its operating margins
would have been 140bps lower if all its stores were leased. Its reported
Figure 107:We estimate gross margins are possibly a
touch lower than a decade ago ...
Figure 108: ... and not correlated with currency
movements (r2=3%)
47.3%46.8%
46.0% 45.9%
45.3%
46.2%
43.8% 43.6%
44.8%
45.6%
44.6%
40.0%
42.5%
45.0%
47.5%
50.0%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Retail Gross margins (%)
-1500bps
-1250bps
-1000bps
-750bps
-500bps
-250bps
0bps
250bps
500bps
H2 2
007
H1 2
008
H2 2
008
H1 2
009
H2 2
009
H1 2
010
H2 2
010
H1 2
011
H2 2
011
H1 2
012
H2 2
012
H1 2
013
H2 2
013
H1 2
014
H2 2
014
H1 2
015
H2 2
015
H1 2
016
Primark's (DBe) gross margin movements vs a theoretical currency model (6m hedges)
DB estimate of Primark gross margins (chg bps) Theoretical currency model
Source: Deutsche Bank estimates
Source: Deutsche Bank estimates, Thomson Reuters Datastream
29 July 2016
Consumer Staples
A B Foods
Deutsche Bank AG/London Page 51
operating margins are lower than some of its major listed competitors (and
lower still on a fully leased basis), but is mitigated by its business model which
aims to drive volumes through low prices.
Figure 109: Primark’s Adj. EBIT margins have fluctuated
between 10-14% on a reported basis
Figure 110: ... though profit per square foot have
generally been increasing
0%
2%
4%
6%
8%
10%
12%
14%
16%
Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15
Primark EBIT margins %
EBIT margin % EBIT margin % fully leased
0
10
20
30
40
50
60
70
80
Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15
Primark EBIT per sq ft (£)
EBIT per sq ft EBIT per sq ft fully leased
Source: Company data, Deutsche Bank estimates
Source: Company data, Deutsche Bank estimates
Low marketing spend
As well as sourcing cheaply, Primark also focuses on keeping operating costs
low. The company does not spend heavily on marketing (except at a local level
around store openings) or celebrity endorsements, but instead relies on large
and visible stores in high footfall locations, social media, its large branded bags
and word of mouth as forms of advertising. Nevertheless, there has been
limited operational leverage, with sales and costs typically growing in line with
each other. We suspect this is deliberate management to operate on low
operating profit margins.
Figure 111: Operating costs have grown in line with sales
...
Figure 112: ... and in the UK we can see that rent and
staff costs are broadly unchanged as a percent of sales
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Primark sales growth vs operating cost growth %
Primark sales growth Primark operating cost growth
10.2
%
11.2
%
11
.7%
11.3
%
10.5
%
10.4
%
10.2
%
10.8
%
10.9
%
11.2
%
11.0
%
3.2
% 2.9
%
3.8
%
3.6
%
3.8
%
3.7
%
3.3
% 3.9
%
3.5
%
3.5
%
3.2
%
2.4
% 3.3
% 3.2
%
2.9
%
2.7
%
2.7
%
2.8
% 2.8
%
3.0
%
2.9
%
2.8
%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Primark UK operating costs as % sales
Staff costs Depreciation Lease costs
Source: Deutsche Bank
Source: Company data (Primark Stores Ltd)
29 July 2016
Consumer Staples
A B Foods
Page 52 Deutsche Bank AG/London
Figure 113: ABF Retail (Primark) historic record
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Revenue 1,006 1,309 1,602 1,933 2,314 2,730 3,043 3,503 4,273 4,950 5,347
Revenue growth % 17.2% 30.1% 22.4% 20.6% 19.7% 18.0% 11.5% 15.1% 22.0% 15.8% 8.0%
- Currency 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% -1.9% 1.0% -1.2% -5.0%
- LFL 9.2% 2.7% 1.0% 4.0% 7.0% 6.4% 3.0% 3.0% 5.0% 4.0% 1.0%
- Space 8.0% 27.4% 21.4% 16.6% 12.7% 11.6% 8.5% 14.0% 16.0% 13.0% 12.0%
Gross profit (DBe) 476 613 737 887 1,049 1,238 1,333 1,527 1,916 2,259 2,387
Gross margin % (DBe) 47.3% 46.8% 46.0% 45.9% 45.3% 46.2% 43.8% 43.6% 44.8% 45.6% 44.6%
Operating costs (DBe) -336 -428 -536 -654 -797 -897 -1,024 -1,171 -1,403 -1,597 -1,714
Adjusted Operating Profit 140 185 200 233 252 341 309 356 513 662 673
Adjusted Operating Profit margin % 13.9% 14.1% 12.5% 12.1% 10.9% 12.5% 10.2% 10.2% 12.0% 13.4% 12.6%
Adjusted Operating Profit growth % 29.6% 32.1% 8.3% 16.3% 8.2% 35.3% -9.4% 15.2% 44.1% 29.0% 1.7%
Source: Deutsche Bank, company data; currency effects on sales not disclosed before 2012
Over half of the group’s capex spend is on Primark
Primark’s capital expenditure has represented half of group capex in the past
two financial years. As a proportion of Primark’s own sales or depreciation, it
has been falling.
Figure 114: Primark represents around half of group
capex ...
Figure 115: ... though capex has been falling as a percent
of its sales
29%38%
46%37%
53% 50%
71%62%
54%63%
47% 50%
0%
25%
50%
75%
100%
Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15
Capital expenditure by division
Retail Other divisions
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15
Primark capex as % sales
Source: Deutsche Bank, company data
Source: Deutsche Bank, company data
This reflects, we think, that a reasonable degree of heavy infrastructure
investment (head office and distribution centres) has taken place, while the
amount of new retail space being added has been quite consistent.
Figure 116: Capex has been fairly constant in recent years
Retail division Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15
Capital expenditure £m 214 323 326 228 378 306
Capex £ per new retail sq ft 369 404 354 285 315 322
Capex as % sales 7.8% 10.6% 9.3% 5.3% 7.6% 5.7%
Capex : Depreciation 2.10 3.23 2.47 1.51 2.21 1.77 Source: Deutsche Bank estimates, company data
Its ROCE and GMROI are increasing
ABF discloses a pre-tax return on average capital employed for each division,
as we saw in Figure 22. From this we can estimate the post-tax ROCE
including capitalised leases, though this requires a number of estimates. The
company does not disclose operating lease charges for Primark, so we assume
29 July 2016
Consumer Staples
A B Foods
Deutsche Bank AG/London Page 53
c.80-85% of group leases relate to Primark. This implies that the rent to sales
ratio is c.3% (UK 2.8% as disclosed in subsidiary accounts and c.4%
elsewhere) or c.4.5% fully leased. We capitalise leases on 8x, in line with
market convention, though we would note that average lease lengths are
probably around 17 years (based on total group lease commitments of £3.5bn
as at Sept-15 and group operating leases of £206m). The calculations are
summarised in Figure 117 and show rising ROCE on all measures.
Figure 117: Primark’s ROCE has been rising, whatever the definition
Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15
Capital Employed
Average Capital Employed (ex leases) 1,451 1,698 1,854 1,973 1,994 2,164
"Debt" Value of capitalised leases (8x) 678 782 894 1,154 1,302 1,380
Average Capital Employed (inc leases) 2,129 2,480 2,748 3,127 3,296 3,544
Return
Adj. EBIT 341 309 356 513 662 673
Taxed Adj. EBIT 273 247 285 410 530 538
Operating leases (DB est.) 85 98 112 144 163 173
EBITR 426 407 468 657 825 846
Taxed EBITR 341 325 374 526 660 676
Tax rate (normalised, DB est.) 20% 20% 20% 20% 20% 20%
Pre-tax ROCE (ex cap leases)* 23.5% 18.2% 19.2% 26.0% 33.2% 31.1%
Post-tax ROCE (ex cap leases) 18.8% 14.6% 15.4% 20.8% 26.6% 24.9%
Post-tax ROCE (inc cap leases) 16.0% 13.1% 13.6% 16.8% 20.0% 19.1% Source: Deutsche Bank estimates, * company data
GMROI (Gross Margin Return on Inventory) is a measure that allows us to
examine the returns retailers are earning on their capital invested in inventory.
This measure takes into account two key ratios that are critical to any retailer,
gross margins and stock turnover and enables a fair comparison to be made
across retailers who have different business models. Neither of these
components are disclosed, however. We have already discussed and
estimated Primark’s gross margins. Primark’s inventory levels are not disclosed
at a divisional level, but net working capital is broadly neutral and we
extrapolate from UK inventory levels, which represented 13% of group sales in
FY Sep-15. We present GMROI and stock turn, on these assumptions, in Figure
118. These returns also appear to have increased over time.
Figure 118: Asset and stock rotation have been accelerating at Primark
Retail division Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15
Asset turn (x) 1.88 1.79 1.89 2.17 2.48 2.47
Stock Turnover (x) 4.09x 3.73x 3.77x 4.10x 4.22x 4.24x
GMROI (x) 1.86x 1.63x 1.65x 1.84x 1.93x 1.89x
Net Working Capital as % sales 1.0% 1.0% 1.0% 0.5% 0.5% 0.5% Source: Deutsche Bank estimates
Growth has not been without its challenges
Primark has gone from strength to strength but nevertheless has faced its own
challenges over time. In November 2005 fire destroyed Primark’s 440,000 sq ft
warehouse at Magna Park. In 2008 it faced negative publicity related to ethical
practices of a small number of sub-contractors. Recession swiftly followed and
then there was management transition. In 2011 high cotton prices impacted
29 July 2016
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profit margins. In 2013, as one of a number of international brands being
supplied from it, Primark was caught up in the tragedy of the Rana Plaza
factory collapse in Bangladesh which killed approximately 1,130 people.
Besides these events, online has a much more rapid channel of growth than
store growth in the apparel industry, but Primark has been able to deliver rapid
sales growth without it.
Market share and competitive landscape
Primark is number 3 in the UK fashion market
The UK clothing, footwear and accessories market was worth £35.8bn
including VAT in the year to May 2016, according to Kantar Worldpanel data
and is highly fragmented. The top three players are M&S, Next and Primark, as
seen in Figure 119, which hold a combined 22% share of the fashion industry.
Figure 120 tracks the market share over time. Its market share has significantly
risen from 1.9% in 2006 to 5% in 2015 but the pace of increase has been
declining. We would note that Primark’s subsidiary accounts report revenues
which imply larger market share gains in most years than those shown in
Figure 120.
Figure 119: In 2015, Primark held a 5% market share in
the UK apparel market
Figure 120: This has grown over time, albeit at a slowing
rate
M&S
10%
Next
7%
Primark
5%
Debenhams
5%
Asda
5%
Arcadia
5%New Look
4%Tesco
3%H&M
2%
Zara
1%
Other
46%
UK Clothing, footwear and accesories market, 2015
1.9
2.9 2.93.1
4.1 4.0
4.44.6 4.6
5.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
Sep 06 Sep 07 Sep 08 Sep 09 Sep 10 Sep 11 Sep 12 Sep 13 Sep 14 Sep 15
Primark UK total market share %
Source: Kantar Worldpanel, Deutsche Bank, 52 week rolling market shares to 20 Dec 2015. Selected retailers shown.
Source: Kantar Worldpanel data, Deutsche Bank, 52 week rolling market shares to mid September of each year
Primark is a relatively young brand in the majority of countries in continental
Europe and has a small but growing market share. These countries have
typically more fragmented clothing markets than the UK, with the top 3 market
leaders holding less than 20% of the market.
Primark’s first international venture was Spain, in 2006, and it has performed
remarkably well. In 2010, Primark ranked number 11 with a 0.9% market share
in Spain, according to Euromonitor. Primark is now the second largest player,
with a 3.2% market share and ahead of H&M. Though Primark remains behind
the clear market leader, Zara (owned by Inditex), we think its volume market
share in Spain is higher than Zara.
29 July 2016
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Figure 121: Primark has a strong market share in the regions where [1] it has
an established presence and [2] the market is relatively more concentrated
Share by value Market share Rank Market share of top 10
Ireland 31% 1 63%
UK 5% 3 47%
Spain 3% 2 25%
Portugal 3% 4 27%
Germany 1% 14 21%
Netherlands 1% 12 20%
Austria 1% 17 25%
France 1% 21 21%
Belgium na na 26%
US na na 18%
Italy na na 16%
Source: Euromonitor, Kantar Worldpanel, Deutsche Bank, company data
A different competitor set in each country
Figure 122 - Figure 131 show the top 10 retailers in each market, including
Primark where relevant.
Figure 122: The Irish clothing market is highly
concentrated, and Primark holds a 31% market share
Figure 123: Primark holds a 3.2% market share in Spain,
behind the leader Zara
30.6
15.8
7.0
3.41.6 1.4 0.8 0.7 0.7 0.6
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
Penneys Dunnes
Stores
TJ
Maxx
H&M Zara River
Island
Monsoon Clarks Schuh New
Look
Top 10 brands by market share (%) - Ireland 2015
7.4
3.2
2.7
2.2 2.2
1.71.5 1.5 1.5 1.4
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
Zara Primark H&M Nike Bershka Pull &
Bear
Mango C&A adidas Massimo
Dutti
Top 10 Brands by Market Share (%) - Spain 2015
Source: Euromonitor
Source: Euromonitor, Zara, Bershka, Pull&Bear and Massimo Dutti are all owned by Inditex
Figure 124: Primark has a 2.8% share in Portugal Figure 125: The German market is led by H&M
6.5
3.5
2.8 2.8
2.1 2.1 2.0 1.91.7 1.6
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
Zara Nike adidas Primark Mo H&M C&A Bershka Pull &
Bear
Massimo
Dutti
Top 10 brands by market share (%) - Portugal 2015
5.4
3.1
2.5
1.8 1.71.4 1.3 1.2 1.2 1.1
0.0
1.0
2.0
3.0
4.0
5.0
6.0
H&M C&A Deichmann adidas Nike Hugo
Boss
S Oliver TCM Esprit Takko
Top 10 Brands by market share (%) - Germany 2015
Source: Euromonitor
Source: Euromonitor
29 July 2016
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Figure 126: ...as is the Netherlands... Figure 127: ...and Austria
5.9
3.5
1.5 1.4 1.3 1.3 1.3 1.2 1.1 1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
H&M C&A Scapino adidas Zara M&S Mode Esprit WE Miss
Etam
VanHaren
Top 10 brands by market share (%) - Netherlands 2015
5.2 5.1
2.8
2.3 2.3
1.9
1.3 1.3 1.31.1
0.0
1.0
2.0
3.0
4.0
5.0
6.0
H&M C&A Deichmann Kik Esprit Fussl NKD COS Takko Jello
Top 10 brands by market share (%) - Austria 2015
Source: Euromonitor
Source: Euromonitor
Figure 128: H&M and Zara are key retailers in France... Figure 129: ...as well as Belgium
3.9
3.1
2.42.2
1.6 1.6 1.6 1.5 1.4 1.3
0.0
1.0
2.0
3.0
4.0
5.0
Kiabi H&M La Halle Zara Camaïeu Nike C&A Etam Cache
Cache
Celio
Top 10 Brands by Market Share (%) - France 2015
6.3
4.7
3.1
2.21.9 1.9
1.7 1.61.3 1.2
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
C&A H&M JBC Zeeman Zara Esprit Brantano Shoe
Discount
Torfs E5-Mode
Top 10 brands by market share (%) - Belgium 2015
Source: Euromonitor
Source: Euromonitor
Figure 130: The US market is dominated by American
retailers
Figure 131: H&M and Zara are amongst the top 3
retailers in Italy
6.0
1.7 1.71.4 1.4
1.2 1.1 1.1 1.1 1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
Nike Old Navy Victoria's
Secret
Target Ralph
Lauren
adidas Jones Under
Armour
Forever
21
Hanes
Top 10 Brands by Market Share (%) - US 2015
3.2
1.91.8 1.8
1.6
1.21.1
1.0 1.0 1.0
0.0
1.0
2.0
3.0
4.0
OVS H&M Zara United
Colors of
Benetton
Nike adidas Giorgio
Armani
Geox Bata Dolce &
Gabbana
Top 10 Brands by market share (%) - Italy 2015
Source: Euromonitor
Source: Euromonitor
29 July 2016
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How Primark compares to its global peers
We have shown these country market shares in some detail in order to
demonstrate that competition is local. Nevertheless, peers like H&M and Zara
are present of all of Primark’s markets and these are some of the more obvious
companies to benchmark Primark financially. Figure 132 sets out some of
these metrics.
Figure 132: Benchmarking Primark against global peers £m Primark Inditex H&M Gap Inc Fast Retailing
Year end Sep-15 Jan-16 Nov-15 Jan-16 Aug-15
Geographies
Home Market UK & Ireland Spain Sweden USA Japan
Number of markets 11* 91 47 52 17
Format
Number of banners 1 9 7 5 6
% sales of leading banner 100% 64% 95% 42% 82%
Total stores (inc. franchise) 293 7,013 3,924 3,721 1,639
- Europe 292 4,888 2,570 275 25
- Americas 1 682 437 2,810 42
- Asia & rest of world 0 1,443 917 636 1,572
Year end space (sq m) 1,036,245 4,086,904 5,008,374 3,521,029 1,626,707
Average store size (at YE) 3,537 583 1,276 946 992
Sales
Sales £m 5,347 15,145 14,108 10,379 9,166
Sales per ave. sq m 5,383 3,847 2,963 2,936 5,987
Sales CAGR (3 years**) 15% 9% 14% 0% 14%
Profits
EBIT £m 673 2,664 2,102 1,001 897
EBIT per ave. sq m 678 677 441 283 586
EBIT CAGR (3 years**) 24% 6% 7% -8% 9%
Currency rate used £1.00 €1.38 SEK12.82 $1.52 ¥183.5
Indexed P&L
Sales 100 100 100 100 100
- Europe 100 70 65 5 2
- Americas 0 10 11 84 3
- Asia & rest of world 0 21 23 11 96
Gross margin 45 58 57 36 51
Operating costs 32 40 42 26 41
EBIT margin 13 18 15 10 10 Source: Deutsche Bank, Company data, *Primark markets include Italy, opened in 2016, ** reported currency
Strategy and the future
Primark’s strategy is to build on the successes of the past and expand its
footprint. There are three main elements to this:
New stores
Primark’s growth strategy is based on roll-out of stores in its 11 current
markets. The company has indicated that it will continue to open new stores in
all of these markets and still sees potential to grow in the UK. Primark opened
its first store in Italy in FY Sep-16 and for a long time has planned to operate 9
stores in North Eastern USA before pausing to assess the business. Over time
we see scope for Primark to enter more markets, particularly Eastern Europe
and eventually Asia.
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Improved stores
There are two aspects to this. The first is to continue to open larger stores and
expand existing stores. The other aspect is to drive its fashion credentials
through its store environment. In recent years its larger store strategy has been
accompanied by improvements in window presentation, visual merchandising
and the introduction of new denim, footwear and beauty departments.
New product development
Primark has developed ranges in new categories in recent years and plans to
grow and develop these further. These have included home accessories,
accessories such as scarves and jewellery, athleisure, licensing e.g. Walt
Disney, and Health & Beauty. Its PS beauty brand is now available in all stores
and sells across a range of fragrances, skincare and makeup. In addition we
expect the brand to continue to test higher price point products, potentially
stretching its price architecture which is biased to the bottom of a
‘good/better/best’ structure.
29 July 2016
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Deutsche Bank AG/London Page 59
Appendix 1
Important Disclosures
Additional information available upon request
Disclosure checklist
Company Ticker Recent price* Disclosure
A B Foods ABF.L 2,689.69 (GBp) 28 Jul 16 NA *Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors . Other information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/Disclosure.eqsr?ricCode=ABF.L
Analyst Certification
The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s) about the subject issuer and the securities of the issuer. In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Warwick Okines
Historical recommendations and target price: A B Foods (ABF.L) (as of 7/28/2016)
1
2
0.00
500.00
1,000.00
1,500.00
2,000.00
2,500.00
3,000.00
3,500.00
4,000.00
Aug 13 Nov 13 Feb 14 May 14 Aug 14 Nov 14 Feb 15 May 15 Aug 15 Nov 15 Feb 16 May 16
Secu
rity
Pri
ce
Date
Previous Recommendations
Strong Buy Buy Market Perform Underperform Not Rated Suspended Rating
Current Recommendations
Buy Hold Sell Not Rated Suspended Rating
*New Recommendation Structure as of September 9,2002
**Analyst is no longer at Deutsche Bank
1. 11/11/2013: Hold, Target Price Change GBP1,900.00 Harold Thompson**
2. 23/04/2014: Hold, Target Price Change GBP3,000.00 Harold Thompson**
29 July 2016
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Equity rating key Equity rating dispersion and banking relationships
Buy: Based on a current 12- month view of total share-holder return (TSR = percentage change in share price from current price to projected target price plus pro-jected dividend yield ) , we recommend that investors buy the stock.
Sell: Based on a current 12-month view of total share-holder return, we recommend that investors sell the stock
Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell.
Newly issued research recommendations and target prices supersede previously published research.
39 %
55 %
6 %
47 % 38 %
24 %0
50
100
150
200
250
300
350
Buy Hold Sell
European Universe
Companies Covered Cos. w/ Banking Relationship
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Copyright © 2016 Deutsche Bank AG
David Folkerts-Landau Group Chief Economist and Global Head of Research
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Research
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Global Head of Economics
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