Foods-to-fashion conglomerate Associated British Foods’ (ABF) shares are off 3.3% at £21.95 on Monday, despite issuing an unchanged full year outlook with continued profit growth at retail chain Primark and the Grocery division.
The main drag is the Sugar business, where sales and adjusted operating profit will be ‘well down’ on last year. A very weak pricing environment owing to a supply glut is overshadowing positive progress everywhere else within ABF’s diversified business.
And the news the group will absorb a £20m currency hit due to the strengthening of sterling against most of its trading currencies is also hurting the stock.
In today’s pre-close trading update, ABF assures the outlook for the year to 15 September remains unchanged with progress expected in adjusted operating profit and adjusted earnings per share alike.
‘Strong profit performances this year from Primark, Grocery, Agriculture and Ingredients are expected to more than offset the adverse effect of lower EU sugar prices,’ reads the statement.
SUGAR SOURS THE OUTLOOK
Yet ABF concedes sales and adjusted operating profit will be ‘well down’ in its Sugar division due to significantly lower EU prices adversely affecting its UK and Spanish businesses.
Given that the global supply of sugar has moved into surplus and the world market sugar price has reduced, the outlook for the Sugar arm remains very weak.
ABF states that for the next financial year the current level of EU sugar prices ‘would represent a substantial reduction on those achieved this year’ and that the effect of this would be only partially offset by continuing performance improvement initiatives.
As previously guided, Sugar profits next year will be ‘significantly lower’ than this year and production will also be much lower.
PRIMARK MAKES PROGRESS
Elsewhere, Grocery sales will be ahead of last year and adjusted operating profit ‘well ahead’, driven by growth in Twinings Ovaltine, improved margin at George Weston Food and a first year of contribution from Acetum, the balsamic vinegar business acquired last October. Profits in the Agriculture and Ingredients divisions will also be higher.
Yet the jewel in the crown of ABF remains Primark, where sales are expected to be 5.5% up on last year, albeit down 2% on a like-for-like basis due to ‘unseasonable’ weather across northern Europe through much of the year.
UK full year sales were 6% higher and 1.5% ahead on a like-for-like basis amid significant clothing market share gains. In comparison to high street rivals, budget fashion purveyor Primark is performing well, although growth has slowed on previous years and the chain isn’t immune to margin pressure.
Primark remains an exciting global expansion story. In the US, ABF opened a new store in Brooklyn in July, its ninth store across the pond. And in the next financial year, Primark plans to continue adding selling space everywhere from Germany, France and Spain to the UK, with a first store in Slovenia set to open in 2019, taking Primark to its twelfth country.
WHAT THE ANALYSTS ARE SAYING
Liberum Capital views recent share price weakness as a buying opportunity and has a £35 target price for the stock. ‘ABF offers investors compelling exposure to secular growth trends in retail over the next 10 years. In our view, Primark remains well positioned to take market share and drive double digit sales growth in full year 2018-19’, comments the broker.
AJ Bell investment director Russ Mould comments: ‘Investors may be getting worried about the ongoing ability of Associated British Food’s Primark business to get the rest of the company out of trouble.
‘Amid a warning of a £20m currency hit to full year profit from currency movements and of lower operating cash flow the company left its full year guidance unchanged in terms of its adjusted performance - stripping out the impact from foreign exchange.
‘The main fly in the ointment is the sugar division which is being hit by the pressure on prices in the European Union which currently enjoys a supply glut.
‘Budget clothing retailer Primark continues to do well and appears to be a beneficiary of shoppers trading down with sales in the UK up 1.5% on a year-on-year.
‘However, it may be asking too much for this part of the business to always come to the rescue given the pressures on traditional retail.
‘And the relatively downbeat guidance for this part of the group confirms this point.'
