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AB Foods raises full-year outlook as interim profits surge

Primark owner AB Foods expects significant growth in full-year profits after upbeat interim results.
Associated British Foods - positive Christmas trading

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Associated British Foods' (ABF) revenue rose 2% to £9.7bn in the first half.This reflected growth in all business segments except for Agriculture, which experienced an 11% decline.

On a like-for-like basis, Primark's sales grew by 2.1%, primarily due to higher average selling prices.

Underlying operating profits rose 39% to £951mn. This was driven by robust margin recovery and improved operational performance.

Free cash flow improved from an outflow of £510mn to an inflow of £468mn as inventory levels normalised at Primark.Net debt was down from £2.6bn to £2.5bn.

ABF now anticipates achieving "significant growth" in both profitability and cash generation, surpassing expectations set at the beginning of the financial year.

An interim dividend of 20.7p was declared, marking a 46% increase from the previous year.

The shares rose 7.2% following the announcement.

Our view

ABF has shown once again it’s best-in-class. New store openings are driving sales growth at Primark, and a significant recovery in sugar production is also sweetening results.

While many other large physical retailers are closing their doors, the key Primark business continues to increase its store count, with many more in the pipeline out to the end of 2026. Overseas expansion is a big part of the game plan and first half sales growth of 38.4% in the US indicates positive progress.

For all this to be possible, Primark has to have a laser-like focus on its ranges and make sure it offers precisely what people want - there's no room for wasted hanger space. This seems to be being executed near-perfectly and is also being supported by Primark's digital pivot.

Carefully managed click-and-collect trials have given management the confidence to expand the service. This will give customers across the UK access to an extended choice beyond their local stores. 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 Primark's not the only show in town. 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.

A strong first half performance has given management the confidence to upgrade its full year outlook. A continued uplift in sugar production and reduced losses at Vivergo, the group's biofuel business, are also expected to boost the bottom line. We're encouraged by recent results, but the consumer and commodity landscapes both remain uncertain. While energy and freight costs may have eased, the geopolitical situation remains fragile, and any escalation could have knock-on effects for global supply chains.

Including lease liabilities, the group's net debt pile was £2.5bn. But compared to forecasted cash profits (EBITDA) of £2.8bn, debt remains well below the group's target. That means there's room to feed excess cash back to shareholders in the form of a special dividend and share buybacks. As always though, shareholder returns are never guaranteed.

ABF offers a dynamic business model and growth opportunities at Primark, especially in the US. And 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.

Associated British Foods key facts

All ratios are sourced from Refinitiv, based on previous day’s closing values. 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
Guy Lawson-Johns
Equity Analyst

Guy works as an Equity Analyst within the share research team, delivering current research and analysis on individual companies as well as broader sectors.

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Article history
Published: 23rd April 2024