Shares in Associated British Foods (ABF) fattened up 2% to £20.68 on Monday as the conglomerate said fourth quarter trading across both its food businesses and budget fashion arm Primark ‘exceeded expectations’.
Having shifted more Primark stock than expected, ‘ABF’ also raised guidance for year-end cash to £1.3 billion. Unsurprisingly however, management still expects earnings for the year to 12 September to be significantly lower due to the impact of store closures and consumer caution caused by the COVID-19 pandemic.
PRIMARK’S POSITIVE QUARTER
Annual adjusted operating profit for Primark, the jewel in the ABF crown, is now expected to be ‘at least at the top end’ of the previously guided £300 million-to-£350 million range following a stronger-than-expected fourth quarter, although the result is well below the £913 million generated by the discount clothing chain in the last financial year.
All Primark stores reopened during May, June and July and ABF today insisted ‘trading during the fourth quarter has been strong’ thanks to Primark’s value-for-money offering and Covid-safe stores.
In fact, according to the latest four week UK market data for sales in all channels, Primark achieved ‘our highest ever value and volume shares for this time of year’.
Since reopening, like-for-like UK sales are expected to be 12% lower, but if Primark’s four large destination city centre stores are stripped out, the decline is a more benign 5%.
Like-for-like sales in Europe are expected to be 17% lower, which reflects increased public health restrictions, particularly in Spain and Portugal, while Primark’s US like-for-like sales are expected to be 9% lower.
STRENGTH IN DIVERSITY
In today’s update, the reassuringly-diversified conglomerate also guided to ‘a very strong increase in the aggregate adjusted operating profit for our Sugar, Grocery, Agriculture and Ingredients businesses over last year’.
ABF’s grocery arm benefited from increased sales through retail outlets in the US, Europe and Australia, whereas increased demand for yeast and bakery ingredients, particularly across the Americas and China, generated higher sales for Ingredients. And as expected, ABF’s sugar business will deliver a much improved profit year-on-year thanks to the strong recovery in EU sugar prices.
THE SHORE CAPITAL VIEW
Reiterating its ‘buy’ stance on ABF, Shore Capital expects to ‘nudge up’ its 2020 estimates and has also placed its 2021 forecast ‘under review for upward revision’.
The broker regards ABF’s current equity valuation as an attractive entry point for a business with ‘market leading global positions in Sugar and Yeast, a growing stable of high quality grocery brands, very well invested assets and what we see as a still immature, highly potent Primark retail format, all of which are supported by a strong balance sheet/cash flows and very well invested assets.’
