Discount fashion chain Primark joins the high street's growing band of Christmas retail winners. Yet shares in diversified parent group Associated British Foods (ABF) slip 3.9% to £25.91 as a mixed first quarter update flags deteriorating sugar profits and the negative impact of sterling strength, thwarting upgrades required to sustain its upwards share price trajectory.


Web chart - ABF - Jan 2014

Over the festive period, the seeming ubiquity of Primark shopping bags suggested a good update could be in store and the budget-level fashion phenomenon hasn't disappointed, beating forecasts with a sparkling performance for the 16 weeks to 4 January.


Sales skipped 12% higher at constant currency and were 14% ahead at actual rates, boosted by an 8% increase in selling space. Broker Panmure Gordon estimates Primark enjoyed 4% like-for-like growth, which was all the more remarkable given the impact of unseasonably-warm autumn weather in the first eight weeks of the quarter as well as demanding comparative metrics.


Primark benefited from a lower level of mark downs and a rush at the tills in the run-up to Christmas. Strong sales combined with a more positive margin outlook prompts Panmure Gordon to upgrade its full-year EBITA (earnings before interest, tax and amortisation) forecast for the retail chain by 7.3% to £592 million. Now with 268 stores spanning the UK, Germany, Holland, Spain, Austria and Portugal, Primark's European expansion continues apace with its first French store in Marseille described as one of its best openings yet.


Primark-parent ABF, the global fast moving consumer goods (FMCG) group whose empire spans groceries, ingredients and agriculture, is being hit by profit-taking on the back of today's update. The £21.3 billion cap behind grocery brands Twinings, Ovaltine and Silver Spoon reports a worse-than-expected performance from its sugar business. A 27% decline in sugar sales was caused mainly by lower world prices. This causes analysts to slash full-year earnings estimates for this part of the business.


Panmure Gordon increases its price target for ABF from £21.75 to £25, though its 'hold' rating reflects the view the share price is due a pause for breath. Nevertheless, its assessment of the retail arm of the business is upbeat. 'Yet again, Primark has entered a country (this time France) to an enthusiastic reception, and this only strengthens our conviction that Primark has a decade of strong growth to come from store roll-outs across Europe', writes the broker.


Over at Numis Securities, number-cruncher Charles Pick downgrades his rating from 'hold' to 'sell', noting 'ABF shares look to have run ahead too fast and too far'. Based on his year-to-September 2014 earnings per share estimate of 100.6p (2013: 98.2p), ABF sells on a punchy prospective price/earnings (PE) ratio of 25.8 times even after today's pull-back, which highlights the downside risks facing highly-rated stocks.

Issue Date: 16 Jan 2014