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Associated British Foods - uncertainty ahead at Primark

Full year revenue rose 22% to £17.0bn, ignoring the effect of exchange rates, largely driven by a 40% increase at Primark to £7.7bn.

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Full year revenue rose 22% to £17.0bn, ignoring the effect of exchange rates, largely driven by a 40% increase at Primark to £7.7bn. The group benefited from increased traffic as shops reopened this year. UK like-for-like sales are broadly in-line with pre-pandemic times, although continental Europe was weaker because of "cautious" customer sentiment.

Associated British Food's various food businesses also did well, with sales growing 10%, reflecting increased prices. This included a 3% increase in Grocery revenue (22% of group revenue), partly because of strong Ovaltine sales.

Group underlying operating profit rose 38% to £1.4bn, thanks to improved margins at Primark. Cost inflation meant profits were level in the food divisions. ABF had gross investment of £930m, up from £721m, partly reflecting higher spending on technology and automated warehouses.

The timing of inventory deliveries meant there was a cash outflow in the year, and net debt, including lease liabilities, was £1.8bn.

Looking ahead, ABF warned significant cost inflation and wider volatility has made forecasting more difficult. Sales are expected to grow, but profits are predicted to fall, in the next financial year.

The group announced a £500m share buyback programme. A final dividend of 29.9p was announced.

The shares rose 5.0% following the announcement.

View the latest ABF share price and how to deal

Our view

Associated British Foods' full year performance can only be described as a mixed bag. The market has reacted positively to the £500m buyback. That can signal that management believes the recent pressure on ABF's valuation has been overdone. But there are challenges to consider - things may get worse before they get better.

Primark is a crucial part of the business, and we're especially concerned about costs from here. To combat this, prices have been inflated in stores, but this risks an alienation of 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 means profitability is due to take a hit. The group's hinging hopes on increasing volume sold instead.

As a lower-priced option, Primark is better placed to attract custom while inflation bites, but at the same time, should the economic situation become protracted, Primark's fast fashion could find itself left unsold. If we see a situation where volumes struggle and prices are kept stagnant, it will further dent margins.

Margins are also a question mark, as Primark makes improvements to its online offering. The website has been given an overhaul, but stops short of full scale deliveries and is instead more of a viewing platform. A click and collect trial has also been announced. While 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.

Historically, Primark has been best-in-class when it comes to shifting stock and keeping demand elevated. For now, we're cautiously optimistic that trading will be better than feared, but this isn't guaranteed and is something we'll monitor closely.

However, 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 is home to an eclectic mix of other food and commodity businesses. High sugar prices in particular have helped here. ABF is also successfully increasing prices in the Grocery business, passing on increased costs to customers.

The group has a debt pile of £1.8bn. This isn't alarming when compared to cash profit (EBITDA) levels, but is higher than we'd like. The 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, cost pressures and a jittery customer base are likely to keep a lid on performance.

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: 8th November 2022