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ABF - weather impacting Primark, but outlook unchanged

Nicholas Hyett | 6 November 2018 | A A A
ABF - weather impacting Primark, but outlook unchanged

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Associated British Foods Ord 5,15/22p

Sell: 1,591.50 | Buy: 1,592.50 | Change 11.00 (0.70%)
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After stripping out currency headwinds, revenues at ABF for the full year rose 3% to £15.6bn, with adjusted operating profit 5% ahead at £1.4bn.

The shares rose 1.2% on the morning of results.

The board declared a final dividend of 33.3p per share. That takes the full year payment to 45p, 10% ahead of 2017.

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Our view

It's no surprise that the majority of ABF's divisions are in some way tied to the food supply chain. What the name doesn't tell you is it also owns Primark, and it's fashion rather than food that's the driving force behind the group.

Primark's expansion across the Atlantic is of particular importance. The American market offers huge growth potential, which is a big part of the reason why the shares trade at a premium to other retail names, at 17.4 times expected earnings.

And the grass is starting to look green across the pond. Following a slightly choppy trial period, the group's moving into a gradual expansion phase. Trying to crack this crowded market comes with risks, but ABF are moving in the right direction.

Growth in Primark's established UK and European markets is more about new store openings than higher like-for-like sales. New space is being added to stem the impact of disappointing sales from the existing estate. That's perhaps a bold move given the challenges faced by bricks and mortar retailers at the moment. But it's working so far, because Primark's so cheap not even online retailers can compete.

Of the rest of ABF's divisions Sugar is probably the most interesting. It recovered nicely last year, but is now feeling the effect of weaker market prices in the EU. Investors could do without this headwind, but Primark's success means shortcomings here are more than compensated for.

The prospective yield is just 1.9%, but analysts anticipate shareholder returns rising from here as growth continues. How successful the group is at replicating its popularity in the UK and Europe in the US will play a big part in determining the pace and duration of this upwards trend.

The future's not without its challenges. ABF thinks Brexit-related currency movements could dent growth a bit next year, but given what we've seen so far, the group's well placed to bear a couple of bumps in the road.

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Half year results details - at constant currency

Sales at ABF's largest division, Retail, rose 5.2% to £7.5bn. However, this was driven by the addition of new space. Group like-for-like (LFL) sales fell 2.1%. UK LFL sales improved 1.2%, seeing the group gain significant market share. Europe saw LFL decline of 4.7% following unseasonable weather in Northern Europe.

Operating profit in the division rose 13%, to £843m as operating margins improved to 11.3% from 10.4% last year. This was driven by the benefit of the weakening of the US dollar exchange rate on purchases and a strong summer sales period resulting in less discounting at the end of the season.

Margin improvement and revenue growth, driven by Twinings Ovaltine, saw Grocery revenues rise 4% to £3.4bn, with profits up 14% to £335m. Allied Bakeries remains loss making, despite some progress on cost savinsg and price increases. Acetum, the balsamic vinegar business acquired last October, is progressing well.

AB Sugar delivered a weaker performance. The removal of European sugar quotas means the UK and Spanish businesses have to contend with much lower sugar prices. Production is higher in both the Chinese and African businesses. Operating profit was down 49% to £123m.

Favourable product mix and operational improvements in Ingredients, helped profit rise 23% to £143m, with sales up 6% to £1.5bn. Similarly, in Agriculture higher feed volumes helped revenues jump 14% to £1.4bn, with profits up 23% to £59m.

Looking ahead the group expects next year's earnings per share to be broadly in line with this year, although exchange rate volatility linked to Brexit create uncertainties. The group expects to add 16 new Primark stores in the coming year.

Following the acquisition of Acetum, the group's net cash position has declined slightly to £614m.

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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.

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