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ABF - Group outlook unchanged but dividend in doubt

ABF's outlook for the full year to 17 September 2022 is unchanged, and the group expects a significant increase...

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Associated British Food's outlook for the full year to 17 September 2022 is unchanged, and the group expects a significant increase in underlying operating profit. This is despite Retail (Primark), seeing weaker than expected trading in Europe.

The group will decide in November if it has surplus cash and capital available to return to shareholders.

For the new financial year ABF ''now expect adjusted operating profit and adjusted earnings per share to be lower than this financial year'', largely reflecting higher costs at Primark.

The shares fell 8.0% following the announcement.

View the latest ABF share price and how to deal

Our view

We already knew that cost savings across the business can't keep pace with rising costs, and further price hikes will be required. But the extent of cost inflation, coupled with supply chain disruption leading to inventory mishaps, means the final dividend is in doubt.

Primark is a crucial part of the business, and we're especially concerned about costs from here. To combat this, prices have been inflated in stores, but this risks an alienation of the value-chain's core customer base, putting a lid on how far these increases can go. Sensibly, the fashion powerhouse has made the decision to cap these hikes, but that means profitability is due to take a hit. The group's hinging hopes on increasing volume sold instead, with new selling space primed to get tills ringing.

As a lower-priced option, Primark is better placed to attract custom while inflation bites, but at the same time, should the economic situation become protracted, Primark's fast fashion could find itself left unsold. If we see a situation where volumes struggle and prices are kept stagnant, it will further dent margins.

Historically, Primark has been best-in-class when it comes to shifting stock and keeping demand elevated. For now we are cautiously optimistic that trading will be better than feared, but this isn't guaranteed and is something we'll monitor closely.

However, ABF's unique structure should help it navigate the inflationary environment better than some. Just as Primark starts to feel the sting from inflation, the price hikes in other parts of the business should start to filter through. ABF is home to an eclectic mix of other food and commodity businesses. High sugar prices in particular have helped here. ABF is also successfully increasing prices in the Grocery business, passing on increased costs to customers.

The group is now lugging around a debt pile of £1.7bn. This isn't alarming when compared to cash profit (EBITDA) levels, but is higher than we'd like. The burden stems from adverse delivery timings of Primark stock because of supply chain issues. We think this should be temporary blip but support management's decision to be cautious with dividends while uncertainty persists.

ABF is a well-managed ship in the middle of a storm. We believe that storm will pass, but its length and potency is hard to predict. The group offers a dynamic business model and growth opportunities at Primark, especially in the US. In the short-term, cost pressures are likely to keep a lid on performance.

ABF key facts

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.

Full year trading update

The end of lockdowns and a return to normal shopping habits means Retail sales are expected to be up 40% on a reported basis, and ignoring the effects of exchange rates. Stronger performance in the UK was offset by weaker than expected trading in Continental Europe. Like-for-like sales for the final quarter are expected to be 9% below the comparable pre-COVID period. Trading in the US resulted in a 27% increase in revenue on a LFL basis.

Primark has been increasing its prices to offset higher input costs, but will limit these increases going forwards. The group said: ''as a result of the timing of the recent movements in currency and energy prices, and the commercial decision to limit further price increases next year, we now expect Primark's profit margin for next year to be lower than the operating profit margin of 8.0% expected for the second half of this financial year.''

In Sugar, revenue is expected ''to be substantially ahead of last year driven by higher sugar and co-product prices'', which together with cost savings means the majority of adverse effects from cost inflation have been offset. Operating profit is expected to be higher than last year.

The lag between higher input costs and sale price increases means operating profit has fallen, as expected, in Grocery. Revenue's expected to be higher, reflecting price hikes and partially reflecting improved trading at Twinings.

Revenue is due to be notably higher than last year at both Agriculture and Ingredients.

Including lease liabilities, ABF predicts it will have a net debt position of £1.7bn, reflecting an ''unusual'' cash outflow. This was largely caused by an adverse movement in working capital because of inflation and the timing of receipt of inventory.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. 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 disclosure for more information.

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Written by
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 8th September 2022