- Strong first half overshadowed by outlook
- Chief executive warns of consumer weakness
- Analysts divided on whether to buy the shares
If investors wanted proof that stock prices discount future profit expectations rather than past earnings, the reaction to today’s trading update from food-to-retail conglomerate Associated British Foods (ABF) should serve as a useful reminder.
Despite a respectable first-half performance, the firm's shares slumped as much as 145p or 7% to £19.25, making them the worst performer in the FTSE 100, on what analysts took to be a gloomy outlook for Primark.
WHY IS MANAGEMENT CAUTIOUS?
On the face of it there was much to like about AB Foods’ interim statement, with group sales to the beginning of March up a healthy 21% to £9.56 billion thanks to strong demand in both the food and retail divisions.
Food sales were up 23% to £5.33 billion, with the Ingredients business performing ‘exceptionally’ well, while Primark sales were up 19% to £4.23 billion driven by higher footfall, higher prices and higher volumes.
‘The performance of our Food businesses was resilient in aggregate, underpinned by an exceptional performance at Ingredients.
‘We were very pleased with the improvement in Primark sales, which recovered strongly from the second half of the last financial year and drove operating profit margin up to 8.3%, higher than we had expected’, commented chief executive George Weston.
However, instead of focusing on the results, the market seized on Weston’s caution over the risks of an economic downturn and the effect that could have on consumer spending.
‘Rising interest rates and a slowdown in global growth, potentially leading to recession in some economies, could exacerbate debt problems, raise risks of emerging market crises, and could trigger market instability.
‘Whilst consumer spending has proven to be more resilient in this trading period than anticipated at the start of the financial year, household budgets continue to face real pressures as a result of high inflation, increased interest rates and general economic uncertainty.
‘This means that some consumers are having to make challenging and difficult choices in respect of what they spend and where they spend it.’
WHAT DO ANALYSTS THINK?
The team at Liberum were happy with the results and the financial guidance for the full year, but also picked up on the cautious outlook for household spending.
‘The medium-term growth and margin story at Primark remains intact and recent cost pressures from GBP devaluation and freight costs will reversing in the near future. The consumer backdrop is still tough though which underpins our Hold rating.’
Darren Shirley at Shore Capital was more constructive, noting ‘the more positive tone’ of the Primark update, the retailer’s growing US ambitions and the expansion of its click + collect trial to more UK stores.
Although Shirley left his earnings forecasts for this year and next year unchanged, he described the shares’ EV/EBITDA (enterprise value to earnings before interest, taxes, depreciation and amortisation) rating of 8.1 times this year and 7.2 times next year as ‘not demanding’.
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