Associated British Foods' third-quarter revenue rose 16% to £4.7bn, ignoring exchange rates, with all categories seeing positive growth. Primark continued to trade in line with expectations as sales grew 13%.
£319 of the £500m buyback programme has been completed.
The group expects full-year underlying operating profit to be moderately ahead of last year.
The shares remained broadly flat following the announcement.
View the latest ABF share price and how to deal
Our view
Associated British Food delivered some promising results, with sales up across the board.
Sales at the crucial Primark division were up 13% in the quarter, supported by price hikes. But the value-chain is trying its best not to pass along the full extent of rising costs, to avoid alienating its core customer base. We think this is the right move overall and group margins are set to pick up slightly this year.
To help combat these issues, the group's hinging hopes on increasing volumes - which for now are moving in the right direction. While it's a tough environment for retailers, there are some Primark specific strengths. As consumers look for lower-priced options as inflation erodes their income, the group's market share's been increasing in the UK and sales have risen in Europe and the US.
In an attempt to improve its online offering, Primark's website has been given an overhaul, but it's more of a viewing platform and stops short of full-scale deliveries. A recent click and collect trial in the UK has been described as encouraging, and while it's good for the consumer experience, we have concerns. The lack of large-scale delivery infrastructure is a key driver in being able to keep its prices so low.
Price hikes in other parts of the business have started to filter through too, with high Sugar and Ingredients prices softening the blow. ABF is home to an eclectic mix of food and commodity businesses. This diversification helps to spread risk and ensures that the company isn't overly reliant on any one particular product or division. But bear in mind, sugar and other commodity prices are cyclical and will fluctuate over time.
The group's debt pile had grown to £2.6bn at the last count. This isn't alarming when compared to cash profit (EBITDA) levels of £2.3bn, but it's higher than we'd like. Most of this burden stems from adverse delivery timings of Primark stock because of supply chain issues. Free cash flow turned negative in the first half thanks to a pile up of inventory in the Sugar and Primark businesses. For now, we're not overly worried about this. The seasonal Sugar inventory is set to unwind and we anticipate that Primark's stock pile will also fall by the end of the financial year, but it's certainly something we'll be monitoring.
ABF is a well-managed ship in the middle of a storm. The group offers a dynamic business model and growth opportunities at Primark, especially in the US. In the short-term, inflationary pressures are likely to keep a lid on profits. But as inflation eases and commodity costs normalise, we think there's plenty of room for Primark to restore margins. With the current valuation some way below the long-term average on a price/earnings basis, now could mark an attractive entry point for potential long-term investors. Please remember, nothing is guaranteed.
ABF key facts
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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
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