Associated British Foods plc Ordinary 5,15/22p Shares (ABF)

Company overview

The company was founded by Canadian Willard Garfield Weston in 1935, initially as Food Investments Limited. In 1960 the name was changed to Associated British Foods. Today ABF is a multinational food, ingredients and retail group with interests which span the globe. The group's retail subsidiary Primark, a discount clothing chain, accounts for more than one fifth of turnover. Other brands include sugar processing in Europe and Africa (British Sugar), grocery products brands such as Kingsmill and Allinsons (bread), Mazola (corn oil), Twinings (tea) and animal feeds. It is listed on the London Stock Exchange and is a constituent of the FTSE 100 Index.

HL Comment (19 January 2012)

The group's recent trading update saw management highlighting in line trading. Group revenues grew by 12%, broadly matching analyst expectations, with the improvement largely driven by the company’s Sugar and Primark retail businesses. The Sugar business benefited from both higher prices for sugar and increased operating efficiencies, whilst Primark benefited from what management described as ‘good’ like-for-like sales growth over the Christmas period, along with an ongoing expansion in its store footprint - nine new stores were opened including two in Spain, three in Germany, one in each of Portugal and the Netherlands, and two in the UK. Elsewhere, the group's Grocery business made progress – revenues grew by 4% - although heavy promotional activity again impacted margins for its Kingsmill bakery brand. The Agricultural business also enjoyed growth, although rising commodity prices continued to drag on its ingredients division.

Negative Points:

• Elevated commodity prices continue to drag on profit margins for various elements of the business – increased cotton prices for example, have provided headwinds for its clothing Primark business.
• Higher level of capital expenditure and increased working capital, from substantially higher commodity costs, resulted in a higher level of net debt throughout the last full year. Net debt as of 7th January 2012 was a little higher than last year end at £1.4 billion.
• Heavy promotional activity has again impacted margins for its Kingsmill bakery brand.
• At its Ingredients business, the European yeast market continues to prove extremely competitive, with margins suffering from an inability to recover fully raw material cost increases.
• At Primark, the warm weather prior to Christmas dragged on sales.

Positive Points:

• Overall trading remains in line with management expectations. Growth in both sales and adjusted operating profit are forecast for the current financial year, with the profit improvement weighted towards the second half.
• Previous commodity headwinds could in the view of some analysts turn to tailwinds later this year.
• The dividend policy remains progressive. A 4% increase over the course of the last full year was enjoyed.
• The store foot print for Primark continues to be expanded. With consumers across much of Europe under financial pressure, the group's value nature should appeal to an ever growing audience.
• The group remains diverse, in both geographical and product terms.

Consensus

On balance, market consensus currently indicates a strong hold.

All yield figures are variable and not guaranteed.

Fundamental Data

Values are quoted in the stock's local currency: British pound.