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Associated British Foods - Shares dip on full year numbers

George Salmon | 7 November 2017 | A A A
Associated British Foods - Shares dip on full year numbers

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Associated British Foods Ord 5,15/22p

Sell: 1,651.00 | Buy: 1,652.00 | Change 3.50 (0.21%)
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Group operating profits rose 13% to £1.4bn at constant exchange rates (CER), with performance boosted by a strong recovery in the Sugar business. However, the group confirmed it is to reduce the size of three US stores, a crucial market for the next stage of the business' growth. The shares dipped 4.3% on the news.

The final dividend of 29.65p takes the total for the year to 41p, a 12% increase on the prior year.

Our view

Sugar may have delivered an eye-catching improvement last year, but the long-term potential of ABF is more closely knitted to Primark's fortunes.

Of particular importance is the group's expansion across the Atlantic. Part of the reason the shares trade on 24.1 times expected earnings, a premium to other UK retail names, is that the vast American market offers huge growth potential. Of course, the risk is that the brand fails to gain traction in the notoriously competitive US fashion sector.

The news Primark is downsizing three of its eight US stores will have no doubt raised an eyebrow or two, especially given ABF's measured approach to expansion so far. However, we're not panicking just yet. The odd bump on the road to finding its niche stateside is to be expected.

Growth in Primark's established UK and European markets is more about new store openings than higher like-for-like sales. This may not be anything to write home about, but the group is still seizing market share from rivals, and we can expect another 1.2m sq. ft. of sales space to open this year.

The stronger US dollar has raised Retail input costs, but operational efficiencies and a firmer stance on markdowns means ABF is confident operating margins will remain flat at a shade over 10% this year.

The dollar effect is also present in the Grocery division, and while Sugar recovered nicely last year, it is set to feel the effect of weaker EU prices going forward. Investors would rather do without these headwinds, but really only Primark has the potential to move the dial.

The current prospective yield may be just 1.4%, but analysts anticipate shareholder returns rising from here on as Primark's growth continues. How long the dividend can continue on an upward trend will largely depend on how successful the group is at replicating its UK and European success stories in the US. Early indications are good, but details remain thin on the ground.

Full year results (CER)

The Retail division saw adjusted operating profits rise 5% to £735m, as the 12% growth in revenues was partly offset by the strong US dollar raising input costs. Growth was derived from a combination of 1% like-for-like sales growth and the addition of 1.5m sq ft of selling space.

The Sugar business recovered strongly. Adjusted revenues at AB Sugar rose 21% to £2.2bn. After reporting £35m of profit last year, the division delivered £223m this time around. Higher EU sugar prices, and the group's own improvement measures assisted growth.

In ABF's Grocery division, a good year at Twinings and George Weston Foods was countered by weakness in the UK's bakery division, where competitive and inflationary pressures led revenues and margins down. Overall, revenues remained flat at £3.4bn, with operating profits falling 6%.

Within the group's smaller divisions, adjusted operating profits in Ingredients rose 18% to £125m, driven by a strong showing in speciality ingredients and further cost reductions. Despite revenues rising at AB Agriculture, profits fell 21% to £50m, as greater competition and higher raw material costs weighed.

Higher capital expenditure and spending on operating intangible assets, up 7.7% to £866m, was driven by a higher level of investment by Primark. Despite this, the group's higher profits and a reduction in working capital helped operating cash flow improve. This improvement, plus disposals exceeding £500m, saw last year's net debt position switch into a net cash balance of £673m.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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.