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Associated British Foods - sales rise but profit to remain flat

Associated British Food's revenues are expected to grow by 16% in the first half of the year...

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Associated British Food's revenues are expected to grow by 16% in the first half of the year, ignoring the effects of exchange rates. This was driven by a strong performance by Primark where sales are also expected to grow at 16% to £4.2bn. The group stated consumer spending has been more resilient than expected.

Half-year underlying operating profit is expected to be broadly in line with last year. Performance in the Food and Ingredients business is set to largely offset weaker performance in the Grocery business.

Cash outflow is expected to be around £900m, largely due to the dividend and buyback programme, as well as the seasonal increase in inventory in the Sugar business. Net debt, including lease liabilities, is expected to be £2.6bn.

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 shares rose 2.0% following the announcement.

View the latest ABF share price and how to deal

Our view

The crucial Primark division has been facing significant cost inflation of late. While increased sales prices have helped to combat this, price rises risk alienating 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's resulted in margins and profitability coming under pressure.

The group's hinging hopes on increasing volume sold instead, and for now this strategy is working. Market share is increasing in the UK and sales are increasing in Europe and the US as shoppers find refuge from cost-of-living pressures in the value retail store. As a lower-priced option, Primark's well positioned to deal with consumers' shrinking budgets.

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 inflation, price hikes in other parts of the business have started to filter through, with high sugar prices in particular softening the blow. ABF is home to an eclectic mix of other food and commodity businesses. This diversification helps to mitigate risk and ensures that the company isn't overly reliant on any one particular product.

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.

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, jittery customers and inflationary pressures are likely to keep a lid on profits. But longer term, with inflation easing and commodity costs normalising, we think there's plenty of room for ABF to restore margins.

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
Aarin Chiekrie
Aarin Chiekrie
Equity Analyst

Aarin is a member of the Equity Research team. Alongside our other analysts, he provides regular research and analysis on individual companies and wider sectors. Having a keen interest in global economics, he knows how macro-events can impact individual companies.

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Article history
Published: 27th February 2023