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Associated British Foods - 'Well ahead of last year'

George Salmon | 11 September 2017 | A A A
Associated British Foods - 'Well ahead of last year'

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Associated British Foods Ord 5,15/22p

Sell: 2,883.00 | Buy: 2,884.00 | Change 9.65 (0.33%)
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Having previously guided expectations on second half margins down in the Retail division, the group now says higher efficiencies and lower markdowns will see margins improve on H1. The shares, which have had a strong run so far this year, were little moved on the news.

Our view

Primark's US expansion seems to be gathering momentum. The group opened another two stores in the third quarter and initial trading looks strong. It's still early days, but a Primark that trades well in the States will have huge growth potential. On the other hand, if the brand fails to gain traction in the notoriously competitive US fashion sector a lot of hopes will have been dashed.

In Europe, growth is being driven by new store openings, with like-for-like sales broadly flat. This may not be anything to write home about, but the group is still seizing market share from rivals.

Low sterling looks set to provide a significant boost to the group's profits this year but it's a double-edged sword. Recent dollar strength has seen the cost of goods go up, and although it has managed to offset some of the impact through efficiencies and by offering fewer discounts, it still looks like Retail margins will fall.

Rising input costs are having similarly unpleasant effects in the group's Grocery division (its second largest). Bread, which includes the Kingsmill brand, is having a particularly tough time.

Elsewhere in the sprawling conglomerate that makes up ABF, sugar looks to be making a bit of a comeback. Global prices have recovered somewhat and combined with increased production, this has helped the division provide a sweetener to group profits.

ABF's other divisions are small and unlikely to move the dial too much. Primark remains the focus, and it's the growth potential here that explains the group's 24.1 times Price/Earnings ratio.

Pre Close Period Trading Update

In the Retail division (Primark) full year sales are expected to be 13% ahead of last year at constant currency, driven by increased retail selling space and 1% growth in like-for-like sales. Trading in the UK has been particularly strong recently.

The group added 1.5m sq.ft. of sales space in the year, including 30 new stores across 9 countries. Looking ahead, we can expect to see 1.2m sq.ft. added next year, including the opening of a 9th US store.

In Sugar, revenue and adjusted operating profit will be well ahead of last year on a comparable basis. UK production of 900,000 tonnes was abnormally low, as a result of the high level of stocks brought forward from the prior year. The current crop is developing well, with 2017/18 production expected to be at least 1.4m tonnes, however EU sugar prices look set to fall. Growing conditions in ABF's South African (Illovo) and north Chinese operations are favourable at present.

Across the other divisions, the group expects operating profits to be well ahead of last year in the Ingredients business, but lower margins and profits in the Grocery and Agriculture businesses. The group also announced the acquisition of Acetum S.p.A., the leading Italian producer of Balsamic Vinegar of Modena. The deal remains subject to final regulatory approval.

ABF expects to have a net cash position of around £650m, compared to £315m last year. This increase can be attributed to the higher expected profits, better management of working capital and the sale of the south China sugar and US herbs & spices business.

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