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Associated British Foods - A mixed bag

George Salmon | 18 January 2018 | A A A
Associated British Foods - A mixed bag

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Associated British Foods Ord 5,15/22p

Sell: 1,889.00 | Buy: 1,890.00 | Change 0.00 (0.00%)
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First quarter trading from ABF confirmed sales at the key Primark division were slightly behind consensus, although going forward margins look be better than expected. The group also said the outlook for its Sugar division is weaker than anticipated.

The shares dipped 1.3% on the news.

Our View

ABF may be a sprawling conglomerate, but we feel its long-term potential is most 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 20.6 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 the brand fails to gain traction in the notoriously competitive US fashion sector.

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 a total of 1.2m sq. ft. of sales space to open this year.

The stronger US dollar has raised Retail input costs, but operational efficiencies, increased buying power and a firmer stance on markdowns means the group is confident margins will hold up from here.

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 could do without these headwinds, but really only Primark has the potential to meaningfully move the dial.

The prospective yield may be just 1.6%, but analysts anticipate shareholder returns rising from here as 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.

November's news, that Primark is downsizing three of its eight US stores will have no doubt raised an eyebrow or two. However, we're not panicking just yet. The odd bump on the road to finding its niche stateside is to be expected, and trading has consistently been described as good.

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Q1 trading details (at constant exchange rates)

Underlying revenues for the 16 weeks to 6 January rose 4%. Other than an anticipated decline in Sugar, all the group's businesses delivered growth. ABF continues to expect progress in underlying operating profits this year.

Sales at Primark were 7% ahead, driven by increased retail selling space, which has risen from 13.1m sq.ft. to 14.2m sq.ft. over the last 12 months. Recent openings have included in Ireland, Germany, the UK and France. Sales in the UK and US are progressing well. Although an unseasonably warm October held back sales across Europe, trading was strong in the weeks leading up to Christmas.

Having previously expected to see further declines over the first half, operating margins are now expected to be close to those in the same period last year.

In Sugar, revenue from continuing operations was 12% behind last year. Looking ahead to the full year, revenue and profits look set to fall by more than expected, with the UK and Spain impacted by significantly lower EU sugar prices. Production at Illovo is set to rise slightly to 1.7m tonnes, but local currency price increases in some markets are expected to be a little behind inflation.

Grocery sales were 4% higher, with Twinings and Ovaltine brands performing well. Ingredients sales also rose 4%, with AB Agriculture 13% up on last year.

Find out more about Associated British Foods shares including how to invest

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.