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Associated British Foods - Primark boosts results

At the half-year mark, sales and underlying operating profit are expected to be ahead of pre-covid levels...

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At the half-year mark, sales and underlying operating profit are expected to be ahead of pre-covid levels and "strongly ahead" of last year.

A strong performance at Primark now that all stores are open should offset weakness in the food businesses, which have been impacted by rising costs.

Underlying operating profits are expected to continue growing in the second half.

The shares were down 3.3% following the announcement.

View the latest ABF share price and how to deal

Our view

Associated British Foods' highly diverse business got it through the pandemic with very few scars. Now it looks like ABF's many unrelated revenue streams are about to do it again as the group navigates through this inflationary period.

The food businesses, which picked up slack in Retail during the pandemic, made up about three-quarters of last year's incoming revenue. But as Primark sales come roaring back that proportion should shift somewhat more in favour of the retail arm of the business.

That should help prop up underlying profits, as the food businesses are seeing margins squeezed due to rising input costs. ABF's passed some of those costs on to customers via price increases, but they'll take time to feed through to results.

But Primark's return to pre-pandemic levels should help offset weakness in the food businesses. The pandemic saw Primark work toward becoming a more efficient business. That meant an overhaul on the way the group manages its stock and better use of existing store space.

Stock control has been seriously impressive--the group managed to sell off last year's autumn and winter inventory with very little excess discounting. That's a commendable feat considering the current climate, and went a long way towards helping protect margins.

However the margin improvement Primark's due to experience in the first half will likely be somewhat short-lived. Primark is well placed as a discount retailer, but as costs continue to soar the group has very little space to pass the buck. Its customers also have a lower tolerance for price hikes. That's led management to guide for a margin decline in the second half of the year.

However, ABF's unique structure should help it navigate the inflationary environment. Just as Primark starts to feel the sing from inflation, the price hikes in other parts of the business will start to filter through. Restoring profit margins and ultimately supporting management's guidance for profit growth in the second half.

Overall the balance sheet appears to be strengthening. The profit increases are feeding through to an influx in free cash and an improving net cash position. This could pave the way for another bump to shareholder returns, though of course nothing is 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. This uncertainty is reflected in a lower-than-average price to earnings ratio.

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.

Trading Update

Retail sales are expected to be over 60% higher than last year, reflecting the reopening of Primark stores after lockdowns. Compared to pre-covid times, Primark sales should be 4% lower. This includes the impact of 27 new store openings, like-for-like sales are expected to be 11% below pre-pandemic levels. Operating profit margins should be close to 2019 levels at 11%, helped by favourable exchange rates and cost saving efforts. Inflationary pressure is expected to weigh on margins in the second half.

The Oracle stock management system should be fully in place by the end of the year and the group is on track to launch its new website in the UK by the end of March.

Revenue in Grocery is expected to rise 2%, helped by growth in Twinings and Ovaltine. Rising costs will weigh on margins, as the impact of consumer price increases won't be realised until later periods.

Higher volumes and increased commodity prices should drive AB Sugar revenue 20% higher. Sales growth offset rising energy costs associated with the Virvergo bioethanol plant coming online, so underlying operating profit should improve.

Revenue in AB Agriculture is expected to be "well ahead" of last year, but margins will decline compared to the first half of the year as it will take time for price increases to offset rising costs.

Volume increases in specialty ingredients should offset lower demand for baking ingredients as lockdowns were lifted, leading Ingredients revenue 10% higher. Cost saving has mitigated the impact of inflation, but margins will be lower as consumer price hikes won't be evident yet.

Cashflow is expected to have improved with the sale of autumn/winter inventory from last year and all stores now open. This should feed into a £795m increase in net cash excluding lease to £1.5bn.

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
Laura Hoy
Laura Hoy
ESG Analyst

Laura is part of HL's ESG analysis team, working to offer research and analysis to help with sustainable decision making. She also works with other parts of the business to help integrate ESG.

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Article history
Published: 28th February 2022