Associated British Foods plc (ABF) Ordinary 5,15/22p Shares
HL comment (23 January 2024)
Associated British Foods' (ABF) revenue rose 5.4% to £6.9bn in the 16 weeks to 6 January, ignoring the impact of exchange rates. This reflected growth in all business segments except for Agriculture, which saw a decline of 10.8% due to weak compound feed markets.
On a like-for-like basis, Primark's sales rose 2.1% driven by higher average selling prices. Sales at the start of the period were slow but have since improved due to recent cold temperatures.
Group profitability is being driven by a recovery in Primark's margin and improved British Sugar profitability as production increased towards historic levels.
ABF is "confident" it can deliver a full-year underlying operating margin of 10.0% at Primark, up from 8.2% in the prior year as material and freight costs ease.
The shares were broadly flat following the announcement.
Associated British Foods (ABF) continues to put in a strong showing. 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, with very positive numbers coming from its operations in the US.
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.
Primark's website has been given an overhaul. A click-and-collect trial in the UK was described as encouraging and has been extended to womenswear. 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.
Overall, group profit growth's expected to accelerate this year, helped partly by lower freight and material costs. An 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 this assessment but will need some hardened proof before celebrating. The consumer and commodity landscapes both remain uncertain, and trouble in the Red Sea is having knock-on effects for global supply chains.
Including lease liabilities, the group's net debt pile was £2.3bn at the last count. But compared to underlying cash profits (EBITDA) of £2.4bn, 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. As inflation eases and commodity costs normalise, we think there's plenty of room for Primark to restore margins. 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.
ABF key facts
- Forward price/earnings ratio (next 12 months): 12.7
- Ten year average forward price/earnings ratio: 19.7
- Prospective dividend yield (next 12 months): 2.7%
- Ten year average prospective dividend yield: 1.9%
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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