Shares in foods-to-fashion business Associated British Foods (ABF) topped the FTSE 100 risers board on Tuesday on a more positive margin outlook for Primark, the discount retail chain and jewel in the ABF crown.
Shares in AB Foods rallied more than 5% to £23.69.
Improved sentiment towards the company was also stoked by better than expected full year results and a confident outlook from chief executive George Weston, who insisted his charge is ‘well-positioned for further progress’ in the coming year thanks to ‘the continued expansion of Primark, a material improvement in our sugar profit and strong profit growth in grocery.’
PRIMARK MARGIN GUIDANCE IMPROVES
AB Foods’ results for the year ended 14 September were resilient. Growth at discount fashion chain Primark, which celebrates its 50th anniversary this year, and from the grocery division, more than offset a steep profits decline in the sugar business.
Group pre-tax profit crept up 2% to a shade over £1.4bn, ahead of the £1.394bn called for by Shore Capital, as affordable clothing purveyor Primark’s operating profit strutted 8% higher to a better than expected £913m.
Primark’s UK performance remained solid too, sales growth of 2.5% in a weak clothing, footwear and accessories market signifying significant share gains.
In the outlook statement, management also said the stronger pound means margins won’t be down by as much as feared this year.
READ MORE ABOUT ASSOCIATED BRITISH FOODS HERE
AJ Bell investment director Russ Mould explained: ‘Fluctuations in the pound amid Brexit uncertainty impact the balance between what the company pays for its products overseas and what it gets from the UK shoppers which still account for the biggest chunk of its customer base.
‘The pressure is ratcheted up still further because Primark’s key selling point is its low prices and if it passed on the costs from exchange rate movements it might alienate loyal followers of the brand.’
Mould pointed out currency volatility is ‘a double-edged sword for the business as the group as a whole generates a significant proportion of its earnings overseas and weak sterling means these are worth more when converted back into pounds and pence.’
SUGAR PROSPECTS SWEETEN
Elsewhere, grocery revenues rose and margins expanded, boosted by strong revenue growth from Twinings Ovaltine, although sugar profits soured due to last year’s further decline in EU sugar prices.
The good news is EU sugar prices have since increased and AB Foods looks forward to ‘a material increase in our sugar profit’ in the new financial year. ‘The performance of the company’s sugar business has been far from sweet in recent times and these results represent a continuation of that trend,’ continued Mould.
‘However, management seem to be confident earnings have bottomed out here, with the impact of lower costs and improved EU sugar prices expected to come through.’
WHAT THE BROKERS ARE SAYING
Shore Capital commented: ‘Overall a pleasing set of results that represents a modest beat to expectations, looking into full year 2020 we would fully be expecting to be upgrading our forecasts on the more positive guidance and outlook for Primark full year 2020 margins.’
Liberum Capital rates the shares a ‘buy’ with a £30.70 target price, arguing AB Foods ‘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 mid to high-digit sales growth in full year 2019-2023.’
