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Associated British Foods - trading as expected

Ignoring the impact of exchange rates, revenue in the third quarter rose 32% to £4.0bn.

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Ignoring the impact of exchange rates, revenue in the third quarter rose 32% to £4.0bn. This reflected double-digit growth in the Food business and a near doubling of revenue in Retail as covid restrictions eased.

Trading in the period met expectations and the group's still expecting ''significant progress'' in underlying operating profit at the full year.

Shares were up 2% 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. But now we're out the other side and sales are returning to pre-pandemic levels, its cost inflation we're worried about. While inflation-related warning bells were noticeably absent from the group's third quarter results, we've yet to see the full impact take shape. Earlier on, the group warned that savings across the business can't keep pace with rising costs and further price hikes will be required.

The food businesses, which picked up slack in Retail during the pandemic aren't being as heavily relied on now Primark stores are back open. That should help prop up underlying profits, as the food businesses are susceptible to rising input costs, which will weigh on margins. ABF's passed some of those costs on to customers via price increases. But it's too soon to say whether this will be enough. These actions often lag cost inflation, and with the added issue of rising energy prices, margins could deteriorate.

Primark's return to pre-pandemic levels is very welcome then and 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 could be somewhat short-lived. Primark is well placed as a discount retailer, but as costs continue to soar the group's hinted at selective price hikes to try and protect margins. That could lead to some volume decline if not executed perfectly, given customers are more sensitive to pricing, so there's risk in taking that approach.

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 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.

Third Quarter Results (constant currency)

Revenue in Grocery rose 4% to £932m thanks to price increases. Twinings sales declined as elevated demand from covid wore off and Ovaltine sales increased with a strong performance in Switzerland, Thailand and Nigeria. A strong performance from British Sugar's energy business and higher sugar prices meant AB Sugar sales were up 7% to £457. AB Agri sales were up 10% to £441m as price increases offset rising commodity prices and energy costs. The Ingredients business saw revenue rise 24% to £489m, with growth in both AB Mauri and ABF Ingredients thanks in part to price increases.

The reopening of Primark stores meant revenue was up 81% to £1.7bn in Retail. On a 3 year basis, like-for-like sales were down 9% with the UK and Republic of Ireland showing improvements, but Continental Europe held back by lingering covid restrictions. The group's increased its store footprint by 0.3m square feet so far this year, with a further five stores expected to be opened by year-end.

The group's launching a trial Click & Collect service in the UK toward the end of the year.

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: 20th June 2022