Associated British Foods is set to report “good topline growth” in the second half, as well as a “significant improvement” in profitability.
In the important retail division, Primark’s revenue is set to rise by around 4% in the second half, driven by the store expansion programme which saw six stores opened, expanded or relocated in the period. But on a like-for-like basis, sales are expected to fall 0.5% as unfavourable weather had a negative impact on footfall.
The Sugar division is expected to deliver underlying operating profits of around £200mn this year, which is below the group’s previous expectations as increased supply has led to a “sharp fall in European sugar prices”. This is set to negatively impact profitability in the new financial year too.
A £100mn share buyback programme has been announced, which is expected to be completed by early November 2024.
The shares fell 4.8% following the announcement.
Our view
ABF issued its trading update early to warn investors that profits in the Sugar division are set to fall short of the group’s previous expectations. Increased supply in the market has led to a sharp fall in sugar prices, which will weigh on profits well into the new financial year.
In the important retail division, new store openings are driving sales growth at Primark. At a time when many other large physical retailers are closing their doors, Primark has many more openings in the pipeline out to the end of 2026, signalling its confidence in its brick-and-mortar strategy. Overseas expansion is a big part of the game plan and second-half sales growth of 25% in the US indicates positive progress.
For all this to be possible, Primark has to have a laser-like focus on its ranges and make sure it offers precisely what people want - there's no room for wasted hanger space. This seems to be being executed near-perfectly and is also being supported by Primark's digital pivot.
Carefully managed click-and-collect trials have given management the confidence to expand the service. This will give customers across the UK access to an extended choice beyond their local stores. 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.
But Primark's not the only show in town. 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.
That’s exactly what we’re seeing play out, and profitability in the Sugar division looks set to come back down to earth in the new financial year. Keep in mind that the consumer and commodity landscapes both remain uncertain. And while energy and freight costs may have eased, the geopolitical situation remains fragile, and any escalation could have knock-on effects for global supply chains.
Including lease liabilities, the group's net debt pile was £2.5bn at the last count. But compared to forecasted cash profits (EBITDA) of £2.9bn, debt remains well below the group's target. That means there's room to feed excess cash back to shareholders in the form of a special dividend and share buybacks. As always though, shareholder returns are never guaranteed.
ABF offers a dynamic business model and growth opportunities at Primark, especially in the US. And with the current valuation some way below the long-term average, now could mark an attractive entry point for potential long-term investors. Please remember, nothing is guaranteed.
Environmental, social and governance (ESG) risk
The retail industry is low/medium in terms of ESG risk but varies by subsector. Online retailers are the most exposed, as are companies based in the Asia-Pacific region. The growing demand for transparency and accountability means human rights and environmental risks within supply chains have become a key risk driver. The quality and safety of products as well as their impact on society and the environment are also important considerations.
According to Sustainalytics, Associated British Foods’ management of ESG risk is strong.
ABF has a comprehensive environmental policy and global supplier code of conduct. Although priorities appear to be set at a group level, each business division has its own approach, resulting in certain businesses reporting more comprehensive sustainability efforts than others.
Associated British Foods key facts
All ratios are sourced from Refinitiv, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
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