Associated British Foods unveils £500mn buyback

Associated British Foods (ABF) shareholders with an eye on the return of capital will be very pleased with the Primark owner’s tasty combination of a £500mn share buyback programme and an 8 per cent uplift in the full-year dividend.

This was confirmed on the back of a mixed set of results, with the most significant surprises (given the detail already shared in a September update) being the size of the buyback and an impairment charge put through against German assets due to weak Primark trading there.

The £206mn charge, recorded due to struggling sales and “unacceptable” store profitability levels, characterised a delicate year for the company's European retail operations, with sales down by 16 per cent against the pre-pandemic period. UK trading was better, and improved as the year progressed, but overall retail sales were still down by 10 per cent compared with three years ago. 

The outlook is challenging – management expects Primark’s adjusted operating profit margin for 2023 to come in below 8 per cent due to commodity price and consumer spending headwinds. When it will get back up to 10 per cent is uncertain, especially as prices have been frozen. Progress with a click and collect system, and a pipeline of 27 new stores for this financial year, should at least help with the top line going forwards.

When it came to the company’s other divisions, which drove the revenue uplift against 2019, sugar, agriculture, and ingredients posted higher profits, with the grocery division the outlier. But the adjusted operating margin was down across all four areas, with ingredients and sugar margins diluted by 130-basis points and 120-basis points respectively. Management flagged a timing lag in cost recovery due to negotiations on price increases with retailers, and it is no surprise that chief executive George Weston said that “substantial and volatile cost inflation will be the most significant challenge in the new financial year”.

Barclays analysts raised their 2023 EPS forecast by 4 per cent to 126p but warned about "footfall trends into 2023 as well as the prospects for the wider clothing apparel market and discretionary spending”. That’s a rational position to take and is reflected in management’s expectation that adjusted operating profits and adjusted earnings per share will be lower in 2023 than in these results.

But with expectations of material food sales growth due to price increases, share price outperformance against the FTSE 350 retail sector over recent months, and the good news of the buyback programme, ABF still looks well-situated. The shares trade at an undemanding 11 times Barclays’ 2023 earnings forecast. Hold.

Last IC view: Hold, 1,547p, 26 Apr 2022