Shares in Associated British Foods (ABF) fell 2.3% to £25.25 after the foods-to-fashion conglomerate warned there is a risk of supply shortages on some Primark lines should Chinese factory production delays persist.

Management caution on the impact of COVID-19, more commonly known as the coronavirus, overshadowed a solid first half trading update from the Twinings tea-to-Ryvita brands owner, which expects sales and adjusted operating profit for the half to 29 February to come in ahead of last year.

Reassuringly, Associated British Foods also left its full year outlook unchanged with Primark trading well and the recovery of its Sugar business on track.

VIGILANT ON COVID-19

Primark sources a broad assortment of its product from China, although it typically builds inventories in advance of Chinese New Year.

As a consequence, the budget fashion chain is ‘well-stocked with cover for several months’ and doesn’t expect ‘any short-term impact’ from the coronavirus.

However, Associated British Foods warned: ‘If delays to factory production are prolonged, the risk of supply shortages on some lines later this financial year increases. We are assessing mitigating strategies, including a step up in production from existing suppliers in other regions.’

Thankfully, Associated British Foods’ Chinese sugar campaign completed in January, before the coronavirus outbreak took hold.

That said, a number of its food businesses have operations in China and while the AB Mauri, AB Agri and Ovaltine factories are operating, they are running at reduced capacity due to labour and logistics constraints.

POSITIVE PROGRESS

Associated British Foods expects half-year sales and adjusted operating profit to come in ahead of last year and also left its full year outlook unchanged, continuing to expect progress in adjusted earnings per share. ‘We expect strong growth in adjusted operating profit in the second half, driven by profit growth for Primark and a second half weighting of the AB Sugar profit recovery’, said the outlook statement.

Despite an operating margin hit from weaker sterling on purchases, the picture at Primark remains highly positive with the budget clothing chain bucking the downbeat UK high street trend.

READ MORE ABOUT ABF HERE

During the half, Primark delivered another increase in share of the UK clothing, footwear and accessories market with new selling space growth more than offsetting a 1.3% decline in like-for-like sales.

‘Trading was particularly good over November and December but weakened in January and February against very strong comparatives in the prior year,’ explained Associated British Foods.

Encouragingly the new store pipeline for international expansion, which is key to the investment case, remains healthy. First half Eurozone sales are expected to be 5.3% ahead of last year thanks to particularly strong sales growth in France, Belgium and Italy.

Associated British Foods also raised spirits with the news its US business ‘continued to perform strongly, delivering like-for-like sales growth, with particularly strong trading at the store in Brooklyn.’

Together with the contribution from planned store openings across the pond, Associated British Foods expects ‘a much-improved operating result for the year’.

WHAT THE EXPERTS ARE SAYING

Liberum Capital is staying bullish on Associated British Foods in the belief the conglomerate offers ‘compelling exposure to secular growth trends in retail over the next 10 years. We believe there is significant scope for the Primark business to expand into Central and Eastern Europe and the USA, and this is not reflected in the share price.’

The broker argues: ‘Primark’s customer proposition of the latest fashion at value-for-money prices, sold at large well-managed stores located in high street and shopping centres allows it to outperform the market, particularly at these times of political and macro uncertainty when the consumer is keeping its expenditure in check.’

Shore Capital is pleased that ‘whilst remaining vigilant management is not guiding to a profit impact from the ongoing COVID-19 events in China’. The broker views Associated British Foods as ‘a high-quality business across its categories, with strong medium-to-long term growth prospects underpinned by sustainable cash generation, very well-invested assets and a strong brand portfolio.’

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Issue Date: 24 Feb 2020