We don’t support this browser anymore.
This means our website may not look and work as you would expect. Read more about browsers and how to update them here.

Skip to main content
  • Register
  • Help
  • Contact us

Associated British Foods- sales rise amid cost inflation

Laura Hoy, Equity Analyst | 20 January 2022 | A A A
Associated British Foods- sales rise amid cost inflation

No recommendation

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: 1,591.50 | Buy: 1,592.50 | Change 11.00 (0.70%)
Chart View factsheet

Market closed | Prices delayed by at least 15 minutes | Switch to live prices

In the 16 weeks to 8 January, sales rose 19% to £5.6bn, ignoring the effect of exchange rates. This reflected growth across all segments, with Retail delivering the strongest performance.

Less discounting at Primark and the ability to sell last year's unused autumn/winter stock has contributed to strong cashflow so far this year. The group's seen cost inflation across all parts of the business, which it intends to offset through cost-saving programmes and price increases.

Management continues to expect ''significant progress'' in underlying profit for the half and full year.

The shares fell 1.6% following the announcement.

View the latest ABF share price and how to deal

Our view

Despite its name, Associated British Food's biggest money maker in normal times is Primark.

The pandemic meant the group had to lean more on its other businesses--Sugar, Grocery, Ingredients and Agriculture, but clothing sales have made more of a comeback than we'd feared.

The result's been a marked improvement in Retail sales as shoppers rush back to their nearest Primark. Still, things aren't completely back to normal--Primark's still trading below pre-pandemic levels, owing partly to a surge in Omicron cases which kept shoppers at home over the important festive season. Primark doesn't have much of a website, so it wasn't able to recoup missing sales in the same way as peers.

Primark's reluctance to join the e-commerce revolution does it no favours in a global pandemic, but the group's got a strong underlying business. 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 even managed to set new sales records at its stores when lockdowns eased. That's helped it avoid excess discounting - a serious gold-star in today's climate, and together with excellent cost control, should help push margins over 10% this year.

There's a chance the margin improvements won't continue if inflation continues marching upward. Primark's well placed as a discount retailer, but if costs continue to soar the group has very little space to pass the buck. Its customers will have a lower tolerance for price hikes.

Associated British Food's idiosyncratic structure should help it navigate the current uncertainty. Sales across the group's various food businesses have been strong - and a particularly good year for global sugar prices mean profits have boomed in the group's sugar businesses across Europe and South Africa.

In fact, all the various food divisions put together account for some 75.2% of operating profits in 2021. True that reflects a tough time for Primark, where profits are little more than a third of what they were in 2019, but the diversity of earning streams has been a real boon in the last 18 months. That's not to say these divisions are a cure-all, ongoing supply chain disruption and rising energy costs have the potential to slow progress, although it's being well-managed for now.

Given the disruption, the balance sheet is in a surprisingly healthy position. At last check, ABF had £1.9bn of net cash under the mattress, and net debt only reached £1.4bn even if you include leases on the Primark store estate. That implies some very impressive cash conversion. The cash pile led to a special dividend at the full year, and further returns are possible, though of course not guaranteed.

ABF has a price-competitive retail product, diversified business interests and strong balance sheet. Future growth opportunities, particularly in the US, and weaker competitors mean we're optimistic about the longer-term picture. Ups and downs are to be expected in the shorter-term though, given the inflationary pressure ahead. This uncertainty is reflected in a lower than average price to earnings ratio.

ABF key facts

  • Price/earnings ratio: 15.0
  • Ten year average Price/earnings ratio: 20.5
  • Prospective dividend yield (next 12 months): 2.4%

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.

Sign up for updates on Associated British Foods

Trading Update (constant currency)

Retail sales were up 36% to £2.7bn, reflecting the reopening of the store estate after last year's closures. Retail parks are continuing to outperform city centre stores, with Retail Park like-for-like (LFL) sales now ahead of pre-pandemic levels. Overall sales are down 5% on pre-pandemic times, with LFLs down 11%.

LFL sales in the UK were 10% below pre-covid levels, while Continental Europe was down 14%, with both regions hurt by a decline in footfall due to Omicron. The US business saw LFL sales 4% ahead of 2019. The group plans to add 0.5m sq ft to its store estate this year.

Operating profit margin was ahead of expectations and is expected to surpass 10% at the half-year, partly reflecting the improved sales. Increasing costs have been mostly offset by favourable exchange rates and lower operational costs.

The group's new website is expected to launch in the UK by the end of March, which will allow customers to see product availability by store.

Grocery sales were up 2% to £1.2bn, but high levels of inflation weighed on margins as price increases lagged the effect of rising input costs. A strong performance from Ovaltine and Twinnings tea offset a reduction in some retail sales due to higher-than-normal volumes last year.

Sugar benefitted from rising European sugar prices, strong sales in Africa and improved domestic sales from Illovo. Revenue rose 12% £609m and operating profit outpaced last year. Significant inflationary pressures, particularly energy costs, were mostly avoided through forward contracts. Sugar production in the UK is expected to rise to 1.04m tonnes, up from 0.9m last year.

Inflationary pressure drove margins lower in Ingredients, though volume recoveries in some specialty ingredients helped sales rise 10% to £528m.

Higher selling prices due to increased commodity and energy costs meant Agriculture sales rose from £507m to £545m.

Find out more about Associated British Foods shares including how to invest

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.