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Associated British Foods - On track for the full year

Nicholas Hyett | 4 July 2019 | A A A
Associated British Foods - On track for the full year

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Associated British Foods Ord 5,15/22p

Sell: 1,644.50 | Buy: 1,645.50 | Change -12.00 (-0.72%)
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Associated British Foods (ABF) has reported a 3% rise in sales in the first three quarters of the year, at constant currency. The group remains on track to meet existing full year guidance, with earnings per share in line with 2018.

The shares were broadly unmoved following the announcement.

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Our view

It's no surprise that most 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 not food that drives results.

Primark's expansion across the Atlantic is of particular importance. The American market offers huge growth potential, and with only a handful of stateside stores up and running there's probably decades of growth on offer if Primark can nail its proposition.

A successful US roll-out has the potential for huge rewards, and the early signs are promising. The group expects to open another two stores in the next 12 months, with more in the pipeline.

It's a slightly different story in the UK, where new shops are driving sales up but like-for-like sales are weak. It can't keep opening up new space indefinitely - Primark's already a very big fish in the small UK pond and the value focus means it's unwilling to expand into online retail. That makes ABF a surprisingly international growth story.

Of the rest of ABF's divisions, Sugar is the one most capable of moving the dial. The end of sugar quotas in the EU resulted in excess supply and lower prices, denting performance recently. There are early signs of a price recovery, but the division is still set to be a drag this year.

At 2.1% next year, the prospective yield is reasonably low, but analysts anticipate shareholder returns rising from here as growth continues.

That growth potential explains why the shares generally trade at a premium to other UK retail names, at 16.5 times expected earnings. A higher rating puts pressure on the group to deliver, although tougher retail conditions mean that rating is actually around 15% lower than it's typically been over the last 10 years.

Cracking the US is undoubtedly going to be a challenge, but the group's got a balance sheet packed with cash and an excellent record of expanding in new territories. The road might be rocky, but we think ABF has a good chance of success.

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Third Quarter Trading Update (constant currency)

In Retail, Primark saw sales rise 4% year-to-date, with increased sales from new openings partially offset by a decline in like-for-like (LFL) sales. The division reported continued growth and significant market share gains in the UK, with sales also rising in Spain, Portugal, France and Italy. Trading in Germany remains tough. The US delivered strong LFL and total sales growth.

Primark's operating margin in the first half was well ahead of the same period last year. Better buying and lower markdowns are expected to support margins for the year as a whole, which are now expected to be better than last year.

Third quarter Sugar revenues were in line with last year, an improvement on the decline reported in the first half. European sugar stocks are declining, which ABF expects to support prices going forwards. The UK, Spanish and Chinese crops all look promising, with a slight delay to South African production following high levels of rainfall.

Operating margins are expected to improve in Grocery following strong results from branded products including Twinings Ovaltine and Acetum balsamic vinegar. Revenues rose 1% in the third quarter.

Ingredients revenues rose 5% in the third quarter. The group completed the acquisition of a specialist bakery ingredients business in Italy during the quarter and announced a yeast and bakery ingredients joint venture in China. Meanwhile, higher input costs mean margins remain under pressure in Agriculture despite higher feed prices driving sales growth.

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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.

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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