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ABF - cancels interim dividend

Sophie Lund-Yates, Equity Analyst | 21 April 2020 | A A A
ABF - cancels interim dividend

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Associated British Foods Ord 5,15/22p

Sell: 1,826.00 | Buy: 1,828.00 | Change 0.00 (0.00%)
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Revenue for the half year ending 29 February rose 3% on a comparable basis to £7.6bn. Underlying operating profit also rose 3% to £682m.

However, the group incurred exceptional charges of £309m. The majority of this reflects a writedown in the value of Primark inventory as stores are closed. Including these charges, profit fell 38%.

The outlook for the Sugar, Grocery, Ingredients and Agriculture businesses is unchanged, but the uncertainty around Primark means ABF can't provide guidance for the rest of the year. The board has also decided not to declare an interim dividend. It will consider a dividend at the end of the year, depending on trading performance in the coming months.

The shares fell 3.2% following the announcement.

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Our view

The shuttering of Primark's shops and lack of online business means ABF's largest division is currently delivering zero revenue. While the group's various food focused divisions seem to have escaped knock on effects from the virus so far, the challenge now is to offset or trim the fixed costs in the retail division.

Underlying operating profits outside of retail count for around 35% of the total. That gives the group some breathing room.

We also take comfort from the fact that early action means 50% of costs look set to be recovered. We suspect that, as one of the few retailers taking on new space, the group enjoys something of a whip hand with struggling retail landlords. Significant available cash also means the group can weather a few fallow months - although the impact on the balance sheet will be long lasting.

However, significant challenges will start to emerge the longer the lockdown drags on. Staff, rents and suppliers all need to be paid, even if they can be reduced to some extent, and that will eat into cash reserves until the group needs to borrowing to keep things ticking over.

Retail operating costs were in the region of £575m a month last year. That includes the purchase of new stock (which will obviously be much lower going forwards) but even after cost saving efforts, the group's £800m of net cash could quickly disappear.

And the challenges won't be magically solved once shops can reopen.

Primark's inventory levels initially swelled because of the disruption, meaning it's sitting on £1.5bn worth of unsellable stock. The group could decide to plaster sale stickers on items to sell them quickly, which hurts margins. There's also the fact safety will continue to be a factor, and the group's prepared to accept lower sales until risks are minimised. We're unlikely to see sales and profits swing from zero to hero overnight.

Nonetheless, while it's far too early to say how things will pan out, we think ABF is one of the better placed names in the retail sector. That's partly because it has significant non-retail businesses but also reflects a relatively healthy balance sheet and strong negotiating position with landlords.

For now the group's priority will be keeping as much cash in the business as possible, which is why the dividend's been suspended. Longer-term we imagine attention will be shifted to striking the right balance between boosting sales and protecting margins.

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First half trading details

Prior to coronavirus, the group was pleased with performance at Primark. Trading in the Eurozone was particularly encouraging, with like-for-like (LFL) sales improving in France and Italy. Market share increased in the UK, and the US business continued to perform strongly. Revenue rose 4% to £3.7bn, driven by increased selling space as overall LFLs fell 0.5%.

Adjusted operating profit fell 1% to £441m, reflecting unfavourable exchange rates on inventory purchasing. Lower costs and lower levels of discounting helped offset this, but operating margins still declined.

Grocery sales were flat at £1.7bn, while underlying operating profit improved 12% to £189m. Margins were helped by cost savings as well as reduced losses at Allied Bakeries. The Speedibake Wakefield factory was destroyed by a fire in February, resulting in an exceptional charge of £25m.

Higher EU sugar prices and increased export sales at Illovo helped Sugar revenue increase 8% to £803m. Underlying operating profit reached £12m.

The Agriculture and Ingredients businesses delivered revenues of £692m and £742m, up 5% and 2% respectively.

The group has net cash of £801m, and has decided to draw down its revolving credit facility of £1.1bn. ABF has arranged for the financial terms set by its lenders, known as covenants, to be waived for next February. Net debt stood at £2.8bn as of 29 February, and the group had available central cash on hand of £1.5bn as of 21 April.

ABF still thinks it can recover 50% of Primark's total operating costs, leaving it with a monthly cash outflow of around £100m while the stores remain closed.

Executive director salaries have been temporarily halved and no bonuses will be paid. Non-executive directors have reduced their fees by 25%.

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