Associated British Foods plc (ABF) Ordinary 5,15/22p Shares
HL comment (26 April 2022)
ABF reported first half revenue of £7.9bn, up 28% ignoring the effect of currency changes, returning to pre-pandemic levels. The increase was largely driven by Primark sales with stores reopen and operating largely without restrictions. That helped operating profit almost double to £706m.
The group warned on rising costs with George Weston, CEO, commenting: "inflationary pressures are such that we are unable to offset them all with cost savings, and so Primark will implement selective price increases across some of the autumn/winter stock.". That's expected to hinder the margin recovery for the current year.
The board announced an interim dividend of 13.8p.
The shares 5.3% following the announcement.
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 that's causing some harm. Savings across the business can't keep pace with rising costs and the group's warned it's going to need further price hikes to help.
The food businesses, which picked up slack in Retail during the pandemic aren't being as heavily replied on now Primark stores are back open. That should help prop up underlying profits, as the food businesses are seeing margins squeezed due to rising input costs. ABF's passed some of those costs on to customers via price increases. But these actions often lag cost inflation, and with the added issue of rising energy prices, margins are expected to be squeezed even further.
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 Primark's due to experience in the first half will likely 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 which are forecast to fall in second half. 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 sing 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
- Price/earnings ratio: 11.6
- Ten year average Price/earnings ratio: 20.5
- Prospective dividend yield (next 12 months): 3.0%
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.
First Half Results (figures at constant currency)
Retail benefitted from the reopening of Primark stores, revenue was up 64% to £3.5bn and broadly in line with pre-pandemic levels. Omicron impacted trading in the middle of the period since which like-for-like sales in the UK and Ireland have recovered. Recovery has been slowing in Continental Europe where restrictions have lingered. Price hikes are expected across some Primark ranges to help mitigate cost inflation. Underlying operating profit for the division increased from £43m to £414m.
Grocery revenue rose 2% to £1.8bn as retail volumes returned to more normal levels, offsetting the impacts of supply chain disruption. Higher costs, especially in Allied Bakeries, meant operating profits fell 9% to £175m. Moving forward, price rises are being put in place to help offset further cost increases.
Higher volumes and prices helped Sugar revenue grow 19% to £914m. Cost inflation remains a significant headwind, but one that's being offset by the higher sales and cost controls. That's helped underlying operating profit increase 8% to £77m, although margins did fall due to start-up costs associated with the Vivergo plant.
Ingredients saw revenue rise 12% to £798m, driven by volume recovery and higher prices. However, that wasn't enough to offset 'significant inflation' which hurt margins and meant underlying operating profit fell 17% to £63m.
Free cash flow at the half year mark was £178m, up from an outflow of £642m last year. Net debt a 5 March 2022 was £1.7bn, up from £1.4bn at the start of the period.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. 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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