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Associated British Foods - better than expected trading

Associated British Foods (ABF) expects to report full year underlying operating profit "moderately ahead" of last year.

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Associated British Foods (ABF) expects to report full year underlying operating profit "moderately ahead" of last year. This includes positive momentum in the group's various food businesses, with the Sugar and Grocery businesses trading better than expected.

In the important retail division, Primark sales are expected to be up 9% on a like-for-like basis, with sales of around £9.0bn. This largely reflects price increases. The group also said new store openings have been performing well. ABF has announced it's rolling out the UK click-and-collect trial to womenswear.

The new financial year is expected to see a recovery in underlying operating profit growth, partly thanks to lower freight costs and favourable exchange rates.

£442m of the £500m share buyback programme has been completed.

The shares were broadly flat following the announcement.

View the latest ABF share price and how to deal

Our view

Associated British Foods is putting in a resilient showing. A 15% increase in sales at the important Primark division is no small achievement at a time when consumers are feeling the pinch.

Starting with bargain prices allows more room to pump up price tags before putting people off. The cost-of-living crisis hasn't stopped customers from flocking to new stores either, which is a direct contradiction to the fortunes of many other large physical retailers who are closing their doors. For all this to be possible Primark has to have a laser-like focus on its ranges and make sure it's offering precisely what people want - there is no room for wasted hanger space. This seems to be being executed near perfectly, and is also being supported by Primark's digital pivot.

Primark's website has been given an overhaul. A recent click-and-collect trial in the UK has been described as encouraging and has now been extended to womenswear, and while it's good for the consumer experience, we have concerns. The lack of large-scale delivery infrastructure is a key driver in being able to keep its prices so low.

Price hikes in other parts of the business have started to filter through too, with high Sugar and Ingredients prices softening the blow. 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.

Overall, group profit growth's expected to accelerate in the new financial year, helped partly by lower freight costs. We're encouraged by this assessment but will need some hardened proof before celebrating - the consumer and commodity landscapes both remain uncertain.

The group's debt pile had grown to £2.6bn at the last count. This isn't alarming when compared to cash profit (EBITDA) levels of £2.3bn, but it's higher than we'd like. Most of this burden stems from adverse delivery timings of Primark stock because of supply chain issues. Free cash flow turned negative in the first half thanks to a pile-up of inventory in the Sugar and Primark businesses. For now, we're not overly worried about this.

ABF is a well-managed ship in the middle of a storm. The group offers a dynamic business model and growth opportunities at Primark, especially in the US. As inflation eases and commodity costs normalise, we think there's plenty of room for Primark to restore margins. With the current valuation some way below the long-term average, now could mark an attractive entry point for potential long-term investors. Please remember, nothing is guaranteed.

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.

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: 12th September 2023