Associated British Foods (ABF) has reported full-year revenue of £20.1bn, up 4% when ignoring currency impacts. All main business segments except Agriculture delivered growth, with Retail sales from Primark up 6%.
Underlying operating profit rose 38% to £2.0bn, reflecting the top line growth and a significant recovery in margins, which helped boost Primark’s profits by 51%.
Free cash flow rose from £0.3bn to £1.4bn and net debt, including leases, was £2.2bn.
ABF is targeting mid-single-digit sales growth from Primark next year. As previously announced, the Sugar division is expected to be significantly impacted by increased supply which has led to a sharp fall in European sugar prices.
Total dividends were up 50% to 90p; consisting of a 20.7p interim dividend, final dividend of 42.3p, and a special dividend of 27.0p. A new £500mn buyback was also announced, to be completed over the next 12 months.
The shares rose 4.2% in early trading.
Our view
ABF’s delivered a strong set of full-year results as margin improvements helped to drive a significant uplift in profits. But there was some bittersweet news. Previously announced falling sugar prices could see the division’s profits fall by as much as 75% this year. Other divisions will have to keep pedal harder to help pick up the slack.
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 expects new stores to contribute around 4-5% in annual sales growth for the foreseeable future. Overseas expansion is a big part of the game plan, and sales growth of 30% in the US indicates positive progress.
Primark isn’t ignoring the value of an online presence though. Click-and-collect trials have been a huge success, and this feature is set to be rolled out to all stores across England, Wales and Scotland by the end of 2025. That’s a big positive for the customer experience, and there’s already data showing it’s driving increased footfall and overall sales growth.
These increased sales, combined with a fall in material and freight costs, were a huge tailwind for Primark's profitability, which improved by more than 50% last year. However, retail is a fickle sector, so Primark needs to retain its laser-like focus on its ranges and make sure it keeps offering what its conscious customers want.
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 is set to come back down to earth this year. And while energy and freight costs may have eased, geopolitical tensions remain fragile, and any escalation could have knock-on effects for global supply chains.
Including lease liabilities, the group's net debt pile was £2.2bn. Compared to its 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 a new share buyback programme. As always though, shareholder returns are never guaranteed.
ABF offers a dynamic business model and growth opportunities at Primark, especially in the US. The current valuation is some way below the long-term average, which could mark an attractive entry point for potential long-term investors willing to accept ups and down along the way.
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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