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Associated British Foods - Full year trading update

Steve Clayton | 7 September 2015 | A A A
Associated British Foods - Full year trading update

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Associated British Foods Ord 5,15/22p

Sell: 1,744.50 | Buy: 1,746.50 | Change -3.00 (-0.17%)
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Ahead of their financial year end on September 12, ABF have provided a full year trading update, which shows little change from the situation reported at the end of their third quarter in July. Their largest business, Primark has grown strongly, mainly due to new store openings, the pace of which will accelerate next year. Currency movements are creating some headwinds here, but so far, largely offset by cost management. The sugar business is still suffering from changes to the EU sugar pricing regime, but this effect should ease next year. Their other grocery, agricultural and ingredients business have traded largely as described at the Q3 stage.

Overall earnings are still expected to show a modest decline this year, largely due to the sugar business. Debts are at low levels, with analysts forecasting a net cash position within two years. The shares responded by declining around 2%.

Our view:

Primark is a behemoth, conquering all it comes up against. So far. Later this year, Primark opens its first store in the States. The initial focus is on the North East, with Boston the first location, with others set to follow in 2016. Success is critical; a Primark that trades well in the USA will have vast growth potential, but if the brand fails to gain traction, in the notoriously competitive US apparel sector, then a lot of hopes will have been dashed.

Across Europe, Primark has traded well, with the latest expansion into France appearing to be highly successful. Consumers in Northern Europe have been especially drawn to the brand, with the company appearing to be a little surprised that opening new stores some distance away from existing ones led to cannibalisation of sales; customers have clearly been travelling long distances to reach Primark, with stores effectively over-trading their location. As problems go, that's one of the better ones to have.

Sugar has not been so sweet of late, with changes to the EU's subsidy regime leading to big falls in achieved prices. That process is largely worked through and British Sugar and ABF's Spanish sugar businesses should be more stable going forward. But sugar is of course not to everyone's taste these days. ABF will be watching the growing anti-sugar campaigns with acute interest. To be fair though, sugar has been in the spotlight for many years.

The rest of ABF is a rag-bag of grocery, agriculture and ingredients businesses, collectively adding up to circa 30% of profits. Primark is more than half of group profits, and with space set to rise by a double digit percentage this year, it is only likely to become more important within the group.

ABF trades on around 30x the consensus earnings per share for FY2016, approaching double its longer run average of more like 17x. That suggests that a fair degree of success for Primark's US foray is baked into expectations and investors should be alert for news of how well the initial stores over there perform.

Trading Details:

Grocery operating profit is seen rising, on the back of stronger margins; reported turnover will be lower due to commodity price declines. UK Bread, where ABF owns the Kingsmill brand, has been challenging. Twinings and Ovaltine saw mixed performances, whilst Ryvita Crispbread was financially stale. The Australian meat business improved, suggesting that sometimes, it really is worthwhile hanging around for Godot.

EU Sugar prices have now stabilised and the stock levels within the quota system have normalised. Profits for AB Sugar will be substantially lower than last year, which itself saw the overall sugar contribution halve, but ABF seem to be calling the bottom of this period of structural adjustment.

Agriculture is expected to deliver a record year, with the animal feed operations benefitting from more efficient manufacturing facilities. The Ingredients business, which primarily supplies the bakery sector is expected to see underlying growth offset by currency movements.

Despite ABF investing well ahead of depreciation, net debt is expected to be lower than last year, and less than 0.3x consensus forecast EBITDA, giving significant strategic flexibility. Recent weakening of emerging market currencies and the strength of the US dollar, which is the principal currency for Primark's clothing supply, are expected to have a negative impact on next year's financial outcome.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.