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Associated British Foods - Shares up as profits beat expectations

George Salmon | 9 November 2016 | A A A
Associated British Foods - Shares up as profits beat expectations

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Associated British Foods Ord 5,15/22p

Sell: 1,660.50 | Buy: 1,662.00 | Change 11.00 (0.67%)
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Shares up as profits beat market expectations

Full year results were ahead of analyst expectations, but the group detailed a more upbeat outlook, with expectations for a better year in many of its divisions next year. The shares rose by over 5% on the news.

The shares rose slightly following morning trades, up 0.7%.

Our View

Primark is a monster, conquering all it comes up against. So far. Primark has opened 5 US stores to date, with a further 3 openings planned next year. Success is critical; a Primark that trades well in the States 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.

The squeeze from a lower Sterling is less of a welcome issue. Almost by definition a Primark customer is price sensitive, so it looks as though raising prices is not an option meaning Primark will be forced to take a hit on margins.

Sugar is looking a bit sweeter of late, and this could provide some upside, but ABF's other divisions are unlikely to move the dial too much. For now, the focus remains on Primark.

Full year results in detail, at constant exchange rates (CER):

Group revenue increased by 4% to £13.4bn, with earnings per share rising by 5% to 106.2p.

Revenue in the Retail division, ABF's biggest, increased 9%, with adjusted operating profit increasing 1% to £689m. Operating margins fell 1ppts to 11.6%, driven by the weaker euro: USD. Margins are expected to be lower still in the future should the pound remain weak against the dollar.

Primark like for like (LFL) sales were -2% for the year, as adverse weather held back growth. Total sales growth was driven by the 1.2m sq ft of sales space added in the year, across 22 net new stores.

The Sugar business saw adj. operating profit rise 55% at to £34m, as EU and worldwide sugar prices rose. With the cost base reduced, the group expects AB Sugar to benefit substantially going forward.

The Grocery division saw adj. operating profit rise 4% to £304m. An increase in Kingsmill volumes drove and growth at Allied Bakeries, while Twinings had another good year. An improvement in operating margin helped the Ingredients division increase adj. operating profit by 24% to £93m, while a tough year in the Agriculture division saw adj. operating profit fall by 6% to £58m.

The group propose a final dividend of 26.45p, which will take the full year dividend up 5%.

Net debt of £315m is up on last year, reflecting the debt taken on as part of the Illovo acquisition, and a negative impact from adverse foreign exchange.

Unless otherwise stated, all estimated figures, including prospective dividend yields, are taken from a consensus of analyst forecasts compiled by Thomson Reuters. These estimates should not be taken as a reliable indicator of future performance.

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 for more information.

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