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Associated British Foods - strong growth from Primark and sugar

Sophie Lund-Yates | 16 January 2020 | A A A
Associated British Foods - strong growth from Primark and sugar

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Associated British Foods Ord 5,15/22p

Sell: 2,681.00 | Buy: 2,683.00 | Change 11.00 (0.41%)
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First quarter revenue rose 4% year-on-year, excluding the impact of exchange rates. That reflects sales growth from both Primark and the sugar business.

The outlook for the full year is unchanged, with progress expected in earnings per share.

The shares rose 3% following the announcement.

View the latest ABF share price and how to deal

Our view

If you popped ABF's hood, you'd find it's actually powered by retail.

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 flagship Brooklyn store doing well. 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. Encouragingly, same-store sales in Europe have started to recover, which combined with new shops has resulted in a more positive performance. The UK, however, is still seeing like-for-likes reverse, so the onus is on new stores to carry the burden. It's a tactic that works, but at some point Primark will start to bump against the side of the tank, so ideally same store performance will be more robust before that happens.

Of the rest of ABF's divisions, Sugar is the one most capable of moving the dial, and things have started to look less sour. A recovery in EU sugar prices and lower production costs are a good recipe for divisional profits - although we'll have to wait until later this year for these benefits to materialise.

Primark's growth potentially explains why the shares generally trade at a premium to other UK retail names, and currently change hands for 16.9 times expected earnings. At 2%, 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 the rest of the business is looking brighter than it has in a while. All-in-all, we suspect there's reason for optimism.

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First quarter trading details (constant currency)

Sales at Primark were 4.5% ahead of last year, driven by new space. Like-for-like (LFL) sales improved, driven by a strong performance in Europe. Three new stores were opened in Spain, Germany and Italy, and the group expects to add a net 0.9m sq ft of new space for the full year.

In the UK, new space meant sales were 4% ahead, despite a marginal decline in LFL sales. The group took more market share of the total clothing, footwear and accessories market, and trading was especially strong during November and December.

European sales rose 5.1% as new space and LFL improvements contributed to growth, and there has been a "notable improvement" in Germany. The US also delivered LFL growth in the quarter.

As expected, operating margins decreased due to the stronger US dollar -partially offset by cost savings.

In Sugar, revenue rose 7% reflecting higher EU sugar prices. Combined with cost reductions full year profits are expected to improve, but this will be weighted to the second half of the year. In the UK and South Africa's Illovo, full year production's expected to be 1.18m and 1.7m tonnes respectively.

Grocery sales were flat. Ovaltine sales were weaker, and sales grew at Twinings, driven by herbal teas in the UK and US.

Within Agriculture, revenue was up 10%, but margins declined. Ingredients posted a 3% rise in sales.

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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 disclosure for more information.