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ABF - performance in line, but coronavirus weighs

Sophie Lund-Yates, Equity Analyst | 24 February 2020 | A A A
ABF - performance in line, but coronavirus weighs

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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: 2,045.00 | Buy: 2,046.00 | Change 75.00 (3.80%)
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ABF expects half-year sales and adjusted profit to come in ahead of last year, reflecting good growth at Primark. The group's full year outlook is unchanged.

However, ABF also warned some of its Ingredients and Agriculture factories are operating at lower capacity because of coronavirus. For Primark, the group said "if delays to factory production are prolonged" it will consider ramping up production in regions outside China to mitigate the impact on supply chains.

The shares fell 1.5% following the announcement.

View the latest ABF share price and how to deal

Our view

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

As the owners of Primark, fortunes are closely tied to appetites for its cut-price clothing, 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 weaker like-for-like performance. 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. And the group's producing some sweeter results in this department, with supply issues being sorted and higher EU sugar prices helping sales.

Primark's growth potentially explains why the shares generally trade at a premium to other UK retail names, at 17 times expected earnings. Although tougher retail conditions mean that rating is actually around 14.5% lower than ABF's ten year average. 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 that pile's growing. It's unlikely to be a totally smooth ridefrom here on in, but looking to the medium-term, we suspect there's reason to be optimistic about ABF.

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Half Year Trading Update (constant currency)

Sales at Primark are expected to rise 4.2%, with 0.2m sq.ft. of new selling space driving growth across the UK, Europe and US despite flat like-for-like (LFL) sales. As previously guided margins in the first half were lower as a strong US dollar meant costs were higher. Operating profit will be marginally behind last year as a result.

In Sugar, higher EU sugar prices are expected to help revenue beat last year's levels. Combined with lower production costs, operating profit is expected to rise. Revenues rose in the South African Illovo business, driven by lower-margin export sales, as increased imports meant more lucrative domestic sales declined.

Grocery revenue is flat as lower sales at Allied Bakeries offset growth elsewhere, including improved Twinings revenue. ABF said operating profit will be ahead, reflecting higher margins in ACH in the US and the lack of one off costs compared to last year.

Adjusted operating profit is expected to decline in Ingredients , as lower margins will offset higher revenues. Agriculture will see revenue rise, but flat operating profit.

Net cash is expected to more than double to £800m. Including new accounting policies which count leases as debt, there would be a net debt position of £2.8bn.

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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.