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Associated British Foods - Sugar sweetens results

Nicholas Hyett | 19 April 2017 | A A A
Associated British Foods - Sugar sweetens results

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Associated British Foods Ord 5,15/22p

Sell: 1,654.00 | Buy: 1,655.00 | Change -5.50 (-0.33%)
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ABF saw adjusted operating profits rise to £652m at the half year stage, up 23% at constant exchange rates, with revenues growing 7%. The interim dividend increased 10% to 11.35p per share.

The shares rose 3.6% in early trading on Wednesday 19 April.

Our View

Primark is a monster, conquering all it comes up against. So far. Primark opened six US stores in the half, with the recently opened Staten Island store reported to be trading well. 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 fashion sector, then a lot of hopes will have been dashed.

Across Europe, Primark has traded well, with the latest expansion into the Netherlands appearing very successful. Shoppers in Northern Europe have been especially drawn to the brand, even the company seems 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 lower sterling is less of a welcome issue, since the group purchases stock in dollars its cost of goods has gone up. A Primark customer is by definition price sensitive, which makes raising high street prices difficult. It looks like ABF will be taking a hit on margins here.

Elsewhere in the sprawling conglomerate that makes up ABF, sugar looks to be making a bit of a comeback. Global prices are recovering and increased production have helped the division provide a sweetener to group profits. However, ABF's other divisions are small and unlikely to move the dial too much. Sugar aside, which is a cyclical business in any case, Primark remains the focus for now.

Half Year Results (constant exchange rates):

A 0.8m sq. ft. increase in selling space helped the Retail division, also known as Primark, continue to grow its share of the total clothing market, with revenues up 11%. However, operating profit fell 2%, to £323m, as the strong US dollar ate into margins. Greater declines are expected in the second half, although overall margin expectations for the full year are unchanged.

Higher sugar prices, increased production in Africa and further benefits from the performance improvement programme drove a 16% increase in Sugar division revenues, while operating profits hit £123m.

ABF's Grocery division, which includes names such as Twinings teas and Jordans cereal bars saw revenues increase 2%, with operating profits up 4% to £151m.

Operating profits in the Agriculture business fell 8% to £22m, despite 8% growth in revenues, as margin pressure in the UK and China offset higher volumes. By comparison Ingredients saw operating profits jump 27% to £61m on revenue growth of just 3%. The strong performance was driven by a recovery in the yeast and bakery ingredients markets as well as an excellent performance from the speciality ABF Ingredients business.

ABF completed £416m of capital investment in the half, mainly in relation to Primark expansion. The disposal of Chinese sugar mills helped the group end the period with a net cash position of £190m (2016: net debt of £315m). Chairman Charles Sinclair, said that the board's outlook for full year results has improved, with good growth expected in both adjusted operating profit and adjusted earnings per share.

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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