Associated British Foods contends with volatile Primark trading, and FirstGroup on track but under pressure

“The FTSE 100 started the week with solid gains despite fresh turmoil in Asia as the Chinese crackdown on the tech sector showed little sign of ending,” says AJ Bell investment director Russ Mould.

“News that Beijing is looking to break up Ant Group’s Alipay hit the wider Hang Seng index which was down more than 2% but UK investors seem to have decided this news has little relevance to them for now.

“It’s hard to read the end-game as the regulatory pressure on Chinese firms continues to mount and this uncertainty is proving extremely damaging to the valuation of the likes of Alibaba and Tencent.

“Further setbacks could see sentiment towards this part of the market turn decidedly toxic.”

Associated British Foods / Primark

“It’s not easy being a retail business and the impact of covid-19 is still being felt as events continue to disrupt trading.

“Even though lockdown measures are now (hopefully) a thing of the past, Associated British Foods-owned Primark still saw volatile trading over the summer because of people being told to self-isolate. There remains a real risk of further disruption if there is an autumn flare-up of covid as more people interact in society and the Delta variant still rages.

“Primark has a simple business model – sell a wide range of clothes and do so at the lowest price possible. Very few people leave its stores with only one item in their shopping bag as there is considerable temptation to keep popping items in the basket as everything is so cheap.

“That puts pressure on the company to keep its stores as fully stocked as possible to take advantage of the typical customer’s shopping habits. Primark has flagged that supply chain issues are likely to hit its autumn/winter inventory levels, so the company will no doubt have to do some clever rearranging of its store layouts to make them look as full as normal.

“Covid restrictions have also impacted its progress with store expansion. It’s having trouble weighing up potential new sites which is negative for a brand that has thrived from planting new flags in various parts of the world.

“Sustaining the store rollout is very important when you consider that Primark doesn’t sell its products online. It’s always said that the economics of the web don’t add up when its product price tags are so cheap.

“On that front, it is interesting to see the company announce plans to launch a new website but there is no sign that this will be a transactional one. Historically it has used the online channel just to showcase products and the new plan seems to be centered on letting customers see which products are available on a store-by-store basis.

“Knowing if something is stocked in your local store or not is useful if you want to avoid a wasted trip into town, but equally it’s a lost opportunity for Primark to sell them something else. Just remember its success has been led by people visiting its stores, browsing the aisles and walking out with products they weren’t initially intending to buy.”

FirstGroup

“While the ‘Back to School’ and end of summer vibe may be a bit of a downer for some, it will definitely put a smile of the face of transport operator FirstGroup as it looks for bus passenger volumes to creep back towards pre-covid levels.

“The return of schools and universities will be expected to drive up the number of people using the bus and it is reassuring that the company feels able to maintain its full year guidance.

“The divestment of First Group’s US school bus and contract transport operations created controversy, with some believing the assets were sold off on the cheap, but the transaction has at least enabled the company to return capital to shareholders.

“Next on the agenda is a sale of the non-core Greyhound intercity bus franchise and management is under pressure thanks to activist investor Coast Capital’s sizeable stake in the business. This pressure is unlikely to let up too much despite the departure this month of FirstGroup CEO Matthew Gregory.

“A more streamlined business might interest bidders after FirstGroup fought off interest from private equity firm Apollo in 2018.

“In the meantime, the company is pushing its ESG credentials hard, gaining an endorsement of sorts through the recent agreement of a sustainability-linked credit facility and aiming to bolster its green credentials further with its new Lumo London-to-Edinburgh rail service. This is being pitched as the lower cost alternative to flying with plant-based food on the menu and carbon calculations published for passengers.”

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