Associated British Foods' profit soars as supply chain pressures ease

Associated British Foods (ABF) shares rose by 9 per cent after the Primark owner beat market expectations. The company’s adjusted operating profit grew 39 per cent to £951mn in the half-year period, which chief executive George Weston said was down to “the restoration of some normality in our markets and supply chains”. Analysts had expected profit growth of a quarter. 

Revenue growth was driven by a 6 per cent uplift at Primark, which benefited from new store openings and price increases put through last year. The division grew profit by 45 per cent to £508mn and widened its operating margin from 8.3 per cent to 11.3 per cent year on year.

The lack of an online delivery option may not have helped sales during the pandemic, but avoiding the temptation to make a big move into ecommerce seems to be paying off. The company's click-and-collect service is being rolled out across all stores in England, Scotland and Wales after an encouraging trial, with management finding that the model "is satisfying unfulfilled demand from both new and existing customers". 

Revenue contracted at the ingredients and agriculture units due to destocking and animal feed demand headwinds, respectively, but the outlook is cheerier across non-retail divisions as profits and margins rose across the board. Profit at the company's second-biggest unit, grocery, were up by a third, aided by better US demand and lower losses at the Allied Bakeries brand. The sugar arm, where profit surged by 29 per cent, is benefiting from much-improved production despite the impact of wet weather. 

The balance sheet remains resilient, with the leverage ratio down to 0.9 times. Net cash before lease liabilities climbed 14 per cent to £668mn. 

After pointing to improvements in profitability and cash generation in a January update, the company now thinks it is "on track to deliver significant growth" over the full year. The margin is expected to rise at Primark, where the focus is on improving volumes. The chunky increase in the interim dividend signals confidence in a brighter outlook. 

Liberum analysts argue that the "store expansion program, further margin potential, and return on investments into capacity expansion in food should combine to deliver double-digit shareholder returns, including 5-6 per cent via dividends and buybacks over the medium term". 

The shares trade at 13 times forward consensus earnings, undemanding in the context of solid results and attractive growth prospects. The company is well-placed to deliver further progress. We move upwards. Buy. 

Last IC view: Hold, 2,253p, 7 Nov 2023