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ABF - revenues and profits up, Primark doing well

Nicholas Hyett | 5 November 2019 | A A A
ABF - revenues and profits up, Primark doing well

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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: 1,635.50 | Buy: 1,637.00 | Change 24.50 (1.52%)
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Full year revenue rose 2% to £15.8bn, while underlying earnings per share (EPS) rose 2% to 137.5p, ahead of guidance for flat EPS year-on-year.

A final dividend of 34.3p takes the payment for the full year to 46.35p, up 3% year-on-year.

The shares rose 3.9% following the announcement.

View the latest ABF share price and how to deal

Our view

Despite what the name might suggest, retail, not food, drives ABF's results.

As the owners of Primark, fortunes are closely tied to appetites for its cut-price fashion, and 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.

Early signs are good, with the Brooklyn store - opened last summer- recording a particularly strong performance. It's good to see ABF making waves across the pond, but taking a big chunk of US market share is still a long way off.

It's a slightly different story in Europe and the UK, where Primark is much more established. Sales growth is being driven by new store openings, which is offsetting declines in like-for-like performance. 14 new stores and almost 1m sq. ft. of new space was added last year, but only so much juice can be squeezed from that particular orange - eventually high streets are saturated with Primark stores.

Of the rest of ABF's divisions, Sugar is the one most capable of moving the dial. Sales and profits have been dragged down lately, reflecting oversupply and weak EU sugar prices. But as supply gets back under control, the group's looking forward to some sweeter results from the division.

Primark's growth potentially explains why the shares generally trade at a premium to other UK retail names, at 15.2 times expected earnings. Although tougher retail conditions mean that rating is actually around 23% lower than ABF's ten year average. At 2.3%, the prospective yield is reasonably low, but analysts anticipate shareholder returns rising from here if growth continues. Remember though, this isn't guaranteed.

Cracking the US is undoubtedly going to be a challenge, but the group's got a balance sheet packed with cash, and that pile's growing. It's unlikely to be a totally smooth ride for here on in, but looking to the medium-term, we suspect there's reason to be optimistic about ABF.

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Full year results (at constant exchange rates)

Primark revenues increased 4% to £7.8bn. Adjusted operating profit rose 8% to £913m, as operating margins improved to 11.7% (2018 11.3%), thanks to favourable exchange rates, better buying and tighter stock management. New sales space offset a 2% dip in overall like-for-like (LFL) sales.

Trading in Germany is still difficult, but even without this, European LFLs sill fell 1.1%. The US business saw a "significantly reduced" operating loss, reflecting positive LFL sales and excellent trading at the Brooklyn store. Two further US stores will open next year.

Grocery revenues of £3.5bn were up 2% on last year, and ignoring costs from the closure of the Twinings factory in China, operating profit rose 14%. An operating margin of 10.8%, compared to 9.8% last year, were driven by improvements in George Weston Foods in Australia and Twinings.

As previously announced, the loss of Allied Bakery's largest private label bread contract will reduce volumes next year.

Sugar sales were 5% down at £1.6bn, with adjusted operating profit down 78%. That reflects weak EU sugar prices and reduced volumes in China. ABF expects EU sugar prices to improve next year.

The Agriculture and Ingredients businesses delivered revenues of £1.4bn and £1.5bn respectively, with adjusted operating profits down 30% and 6% at £30m and £136m. Agriculture was impacted by the closure of the Vivergo plant and lower margins on UK animal feed.

Capital expenditure was £737m for the year, with £100m spent on acquisitions. Free cash flow was £772m, which fed into a net cash position of £936m.

ABF expects underlying EPS to improve again next year.

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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.