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Associated British Foods - Primark upsets foods progress

Nicholas Hyett, Equity Analyst | 14 January 2021 | A A A
Associated British Foods - Primark upsets foods progress

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Associated British Foods Ord 5,15/22p

Sell: 1,591.50 | Buy: 1,592.50 | Change 11.00 (0.70%)
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Associated British Foods (ABF) reported total revenue of £4.8bn in the 16 weeks to 2 January, down 13% year-on-year. That was driven entirely by declines in Primark sales, with the Grocery, Sugar, Agriculture and Ingredients businesses ahead of both management expectations and last year.

Primark full year sales and adjusted operating profit are now expected to be "somewhat lower than last year". Operating profits for the other four divisions are expected to be "well ahead of last year". Given the current level of uncertainty the group is not giving additional earnings guidance.

ABF shares were broadly unmoved in early trading.

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Our view

Primark, Associated British Food's (ABF) largest division, did exceptionally well as initial lockdowns lifted. Lockdown 2.0 had a more severe impact on sales than expected, and Lockdown 3 is set to weigh heavily too, but on balance we're still encouraged by division's performance.

While the absence of an online offering has been a drag recently, we suspect Primark's lower price point will have served it well as cautious consumers ventured back onto the high street. A lack of discounting also helps margins. We've been particularly impressed at the group's stock control. It's been able to shift such huge quantities of what was considered excess summer stock when shops were first forced to close, and much of the winter range sold out.

There's an element of pent up demand which is boosting sales, but crucially basket sizes have been higher than last year. That suggests a longer-term positive trend to us.

The other point in Primark's favour is that, as one of the few retailers taking on new space, the group will enjoy the whip hand when it comes to negotiating with struggling retail landlords. Good cost control will be an important tool, especially with the outlook still uncertain.

Associated British Foods idiosyncratic structure is also helping it in the current turmoil. While Primark may be struggling the group's often neglected food businesses have continued to operate as before. They actually delivered bumper results in the third quarter, and accounted for well over half of sales.

The Grocery division in particular has benefitted from increased sales over the lockdown as consumers eat more at home, and that's enhanced both sales and margins. Meanwhile a cyclical upturn in sugar prices is good news for the sizeable Sugar business.

The balance sheet is also in a surprisingly healthy position. Despite the disruption ABF expects to finish the first half with around £500m in net cash. That implies some very impressive cash conservation over the last couple of months, especially as the group continues to open new stores, and should set the group up well to weather further economic disruption.

The combination of a price competitive retail product, diversified business interests and strong balance sheet means we think ABF is one of the better placed names in the retail sector. While the immediate future remains uncertain, future growth opportunities (particularly in the US) and weaker competitors mean there's a chance the group could emerge from this crisis in a better position than it started. That's not something we would say of many retailers although of course there are no guarantees.

ABF key facts

  • Price/Earnings ratio: 18.9
  • 10 year average Price/Earnings ratio: 20.1
  • Prospective dividend yield (next 12 months): 1.9%

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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First Quarter Trading Update

The Retail business saw sales fall 30% in the first quarter to £2.0bn. That reflects the effect of increased restrictions in the UK and Europe which are estimated to have cost the group £540m in lost sales. While stores were open like-for-like (LFL) sales were down 14% year-on-year.

As of the 14 January 305 stores are closed, representing 76% of selling space. If current store closures continue to the end of the half (27 February), lost sales due to closures are expected to be in the region of £1.05bn. The group expects to save around 25% of the operating cost of closed stores.

On this basis the group expects Primark to broadly break-even in the first half at an operating profit level (2020: £441m profit).

The group opened five new stores in Spain (2), the US (2) and Italy during the quarter. The group expects to open 15 new stores during the year.

Together all four Food businesses saw sales rise 7% to £2.8bn. Agriculture delivered the strongest growth, up 10% to £507m, while Grocery remains the largest contributor to group sales with sales rising 7% to £1.2bn thanks to good numbers from Twinings Ovaltine.

Assuming all Primark stores that are currently open remain so until the half year, the group expects to finish the half with net cash (excluding lease liabilities) of £500m.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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.