Associated British Foods released a trading update ahead of its financial year end on 13 September.
In the important retail division, Primark’s like-for-like (LFL) sales are expected to decline by 2% (consensus: -1%) over the second half. In the UK & Ireland, sales were flat despite the favourable weather. Sales growth remains “strong” in the US, while trading across Europe was weaker.
Grocery sales are expected to be flat over the second half (consensus: +2%), with underlying operating profits set to be “slightly below” prior group expectations due to one-off restructuring costs.
The Sugar division is expected to deliver an underlying operating loss of around £40mn, in line with market forecasts. Most of these losses relate to Vivergo, which is in the process of being shut down.
The shares fell 9.4% in early trading.
Our view
Associated British Foods’ (ABF) second-half performance disappointed markets, causing the shares to fall on the day. This was driven by sales at Primark falling short of market expectations, largely due to softness across continental Europe.
Primark's focus on affordable fashion is helping it to expand its share of a challenging UK market. However, its mature store estate means growth opportunities are limited. But overseas expansion is a big part of the game plan, and strong momentum in the US is helping to offset declines elsewhere. At a time when many other large physical retailers are closing their doors, Primark expects new stores to contribute around 4-5% in annual sales growth for the foreseeable future.
Last year’s increased sales, combined with a fall in material and freight costs, were a huge tailwind for Primark's profitability, which improved by more than 50%. That’s making for some tough comparable figures. With retail being such a fickle sector, Primark needs to retain its laser-like focus on its ranges and make sure it keeps offering what its cost-conscious customers want.
But Primark's not the only show in town. ABF is home to an eclectic mix of food and commodity businesses. This diversification helps to spread risk and ensures that the company isn't overly reliant on any one particular product or division. But bear in mind, sugar and other commodity prices are cyclical and will fluctuate over time.
That’s exactly what we’re seeing play out. A sharp fall in European sugar prices saw profitability fall by more than £140mn in the first half and conditions have since deteriorated. The regulatory picture for its bioethanol plant, Vivergo, has made operations unviable too and this is now set for closure.
Geopolitical tensions remain fragile, and any escalation could have knock-on effects for global supply chains. Current guidance has factored in the impact of tariffs, but the picture can change quickly, and we can’t rule out further disappointments.
Last we heard, the balance sheet was in good shape and should help the group weather the storm. This also means there's room to return excess cash to shareholders through share buybacks. But as always, shareholder returns are never guaranteed.
Primark has growth opportunities abroad, but in the near term, this could be overshadowed by weakness on home soil. And the outlook for sugar could get worse before it gets better. ABF’s current valuation is well below the long-term average, which could mark an attractive entry point for potential long-term investors willing to accept the downside risk that goes with challenging business conditions.
Environmental, social and governance (ESG) risk
The retail industry is low/medium in terms of ESG risk but varies by subsector. Online retailers are the most exposed, as are companies based in the Asia-Pacific region. The growing demand for transparency and accountability means human rights and environmental risks within supply chains have become a key risk driver. The quality and safety of products as well as their impact on society and the environment are also important considerations.
According to Sustainalytics, Associated British Foods’ management of ESG risk is average.
ABF has a comprehensive environmental policy and global supplier code of conduct. Although priorities appear to be set at a group level, each business division has its own approach, resulting in certain businesses reporting more comprehensive sustainability efforts than others.
Associated British Foods key facts
All ratios are sourced from LSEG Datastream, based on previous day’s closing values. 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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