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Associated British Foods - positive third quarter

Sophie Lund-Yates, Equity Analyst | 1 July 2021 | A A A
Associated British Foods - positive third quarter

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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 Food's revenue rose 47% compared to the same time last year, to £3.6bn. That largely reflects the reopening of Primark stores.

Since reopening, Primark trading has been ahead of expectations, and together with a positive performance in the Sugar business, ABF now expects full year underlying group operating profits to be in line with last year.

The shares rose 3.4% following the announcement.

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Our view

We continue to be very impressed by ABF's performance - especially from its biggest division, Retail.

While the absence of an online offering was a drag during lockdowns, Primark's lower price points seem to be serving it well as consumers venture back onto the high street. We've been particularly impressed at the group's stock control. It's been able to shift huge quantities of excess stock from when shops were first forced to close, and since re-opening, it's been setting new sales records at its stores. It's irrefutable proof that demand for Primark's bricks and mortar shopping experience endures.

ABF's also been able to avoid excess discounting. That's a serious gold-star accolade in today's climate, and helps protect margins. 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 Food's idiosyncratic structure is also helping it navigate the current uncertainty. Sales in Grocery have started to temper compared to last year's stockpiling, but are still up for the year as a whole, and performance has been remarkably resilient in our opinion. There's also been a cyclical upturn in sugar prices. That's good news for the sizeable Sugar business, and lockdown baking has boosted the Ingredients division. These divisions are a large reason why ABF has been able to put dividends back on the agenda.

The balance sheet is in a healthy position too. Despite the disruption, ABF has well over £1bn of net cash under the mattress. That implies some very impressive cash conversion, and is something we greatly admire about ABF. Crucially, this net cash hoard offers some protection. Because for all the positives, plenty of uncertainty still remains. As trading patterns start to normalise, it's too soon to say exactly what the big picture will look like over the short to medium term.

Ultimately, 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.

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ABF key facts

  • Price/earnings ratio: 18.6
  • Ten year average Price/earnings ratio: 20.4
  • Prospective dividend yield (next 12 months): 2.0%

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.

Third quarter trading details (figures given at constant currency)

Retail revenue more than doubled in the quarter, reaching £1.6bn. For the year to date, revenue was down 11% because of store closures earlier in the year. For re-opened stores, like-for-like sales were ahead of expectations, although this has started to taper. ABF expects to have reduced its £400m of excess inventory to more normal levels at the full year, although some trading volatility remains depending on remaining restrictions in different regions.

As expected, sales in Grocery have tempered compared to the stockpiling seen last year. Revenue fell 3% to £871m.Twinings Ovaltine did well, but this was offset by other areas. The group expects Grocery revenue to be ahead of last year, but margins will dip largely because of a weaker performance from the North American business.

Higher prices and a strong production performance from Ilovo and China, meant Sugar revenue rose 21% to £406m. Sales are expected to slow next quarter, but full year operating profit is predicted be ahead of previous expectations.

Agriculture revenue was up 10% to £391m, and Ingredients were up 3% to £376m.

ABF said "group cash generation in the quarter was both ahead of expectation and much stronger than in prior years". Net cash, ignoring lease liabilities, more than doubled to £1.5bn. For the full year, this is expected to be £1.7bn.

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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.