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Primark counters ABF's sugar woes

The budget clothing chain reported a 25 per cent increase in operating profit, helping to compensate for continued tough trading in the sugar business
April 24, 2019

Primark continues to be the standout performer at Associated British Foods (ABF), with sales up 4.4 per cent during the first half of its financial year, driven by an increase in selling space from new store openings, including the brand’s largest store ever located in Birmingham. Chief executive George Weston wasn't concerned by a 1.5 per cent sales decline on a like-for-like basis, reasoning that some deterioration is to be expected as new stores cannibalise sales of some existing locations.

IC TIP: Hold at 2551p

Adjusted operating profit at the retail segment increased by a quarter to £426m, thanks to favourable currency translations with the US dollar, reduced input costs (through improved buying arrangements) and fewer markdowns. Mr Weston said neither the average price charged nor the product mix had changed, but the underlying margin increased by 190 basis points to 11.7 per cent.

Management hopes that the worst is over for the sugar business, which has suffered in recent times following the end to EU sugar quotas and a resultant surge in supply. Revenue from sugar fell 13 per cent to £769m, while adjusted operating profit approached the break-even point, against £106m in the 2018 half-year. But a reduction in the total European crop area for the 2019-20 season is expected, with the UK crop area down 7 per cent. Stock is expected to remain low, so this adjustment to supply should mean that ABF can sell sugar at a higher price next year than has been the case over the past 18 months.

The grocery division saw a 5 per cent improvement in profitability, to £167m, on the back of a 3 per cent improvement in sales to £1.72bn, despite new accounting rules wiping £16m off revenue. Allied Bakeries ended its largest contract following disputes on pricing. Mr Weston said the company had been losing money on the contract, and the volume losses from the end to the contract are expected to come through in the next financial year.

Analysts at Liberum expect EPS of 135p during the year to September 2019, increasing to 147p in FY2020.

ASSOCIATED BRITISH FOODS (ABF)  
ORD PRICE:2,551pMARKET VALUE:£ 20.2bn
TOUCH:2,550-2,552p12-MONTH HIGH:2,846pLOW: 2,011p
DIVIDEND YIELD:1.3%PE RATIO:30
NET ASSET VALUE:1,148p*NET CASH:£386m
Half-year to 2 MarTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20187.4260360.911.7
20197.5351549.212.1
% change+1-15-19+3
Ex-div:06 Jun   
Payment:05 Jul   
*Includes intangible assets of £1.66bn or 209p per share