Associated British Food saw its first half revenue rise 17% to £9.6bn, ignoring the effects of exchange rates. This was thanks to growth across all business segments, and the key Primark business grew by more than expected, with sales up 17% to £4.2bn, thanks to higher prices and volumes.
Total underlying operating profit fell 7% to £684m. Profit across the Food businesses grew 4% to £373m, after a particularly strong performance from the Ingredients division. Profit at Primark fell 16% to £351m as the cost of goods, labour, energy and shipping all rose, and Primark decided not to pass the full extent of these rises onto customers.
Net debt, including lease liabilities, grew in-line with group expectations, rising from £1.8bn to £2.6bn. Free cash flow fell from an inflow of £188m to an outflow of £290m as the group spent £140m on share buybacks, inventory levels increased in the Sugar businesses and at Primark. These inventory levels are expected to reduce in the second half.
For the full year, underlying operating profit is expected to be roughly in-line with last year, which came in at £1.4bn. At Primark, the group remains "cautious" about the resilience of consumer discretionary spending.
The board has declared an interim dividend of 14.2p per share, representing a 3% increase on last year.
The shares fell 4.0% following the announcement.
View the latest ABF share price and how to deal
Our view
The crucial Primark division remains under pressure. The value-chain made a conscious decision not to pass along the full extent of rising costs, to avoid alienating its core customer base. We think this is the right move overall, but it does mean that higher energy, labour and shipping costs mean profits have sagged.
To help combat these issues, the group's hinging hopes on increasing volumes - which for now are moving in the right direction. While it's a tough environment for retailers, there are some Primark specific strengths. As consumers look for lower-priced options as inflation erodes their income, the group's market share's been increasing in the UK and sales have rised in Europe and the US.
In an attempt to improve its online offering, Primark's website has been given an overhaul, but it's more of a viewing platform and stops short of full-scale deliveries. A recent click and collect trial in the UK has been described as encouraging, 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.
But while Primark is feeling the sting from inflated costs, price hikes in other parts of the business have started to filter through, 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.
The group's debt pile has grown to £2.6bn. 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. The seasonal Sugar inventory is set to unwind and we anticipate that Primark's stock plie will also fall by the end of the financial year, but it's certainly something we'll be monitoring over the second half.
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. In the short-term, inflationary pressures are likely to keep a lid on profits. But 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 on a price/earnings basis, 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.