The shares have enjoyed a strong run of late, having risen by 23% over the last three months, says our head of markets Richard Hunter.
Associated British Foods (LSE:ABF) has upgraded its expectations, boosted by a strong showing from Primark, the continued benefits of a diversified business and cost pressures which are showing signs of finally weakening.
Primark remains a key driver in the group’s improving fortunes. The return of the consumer to physical shopping and the brand’s value offering are a complementary and compelling combination. While the group is understandably cautious on the immediate outlook for discretionary spending given the tough economic backdrop, for the moment the consumer is showing signs of resilience which defy the retail naysayers.
Like-for-like sales are expected to have risen by 10%, driven not only by greater volumes but also by higher selling prices, which means that the group has been able to offset some of its cost pressures through increases to ticket prices and without losing business. The UK is having a particularly strong run, while Europe has been propelled by similar increases and a new store opening programme is further enhancing prospects. Longer term, expected sales growth in the period of 12% in the US comes against strong comparatives and is evidence that the foray into a major overseas market could yet prove to be something of a masterstroke.
The journey is not all plain sailing, of course, and the strength of the US dollar has had a particular impact on costs, such as freight rates and buying goods from Asia, while elsewhere labour and energy costs continue to outweigh any price increases which the group has been able to pass on to the consumer. Net cash is also likely to have decreased sharply from £1.5 billion to £600 million, largely driven by rebuilding Primark inventories, although on current trading the investment is likely to prove worthwhile.
The website also remains a work in progress, with the click and collect service still in its nascent stages and with the overall offering leaving the Primark business largely reliant on physical sales. This is not proving to be an issue at present, but the lack of a robust online service could yet prove to be a thorn in its side, especially given the fiercely competitive nature of the retail sector.
- Stockwatch: share soars on takeover approach
- FTSE 100 price shocks after year of war in Ukraine
- What’s gone wrong with the stock market?
There is a similar story within the other parts of the group, namely the food businesses. Inflationary costs have shown signs of levelling, with some commodity costs decreasing. At the same time, general cost savings and price increases to the customer have driven higher revenues across the board, at the expense of a slight deterioration in operating profit margin.
These current trading levels lead the group to an improved outlook. While the Grocery business may see a small reduction in operating profit, Ingredients has fared strongly. Primark total sales are expected to grow by 19%, with an adjusted operating profit margin of over 8% and, equally importantly, the overall outlook for the full-year is seen to be in line with the previous year in terms of adjusted operating profit, which represents an upgrade to the previous guidance.
In all, the idiosyncratic nature of the group continues to play into the hands of AB Foods. A diversified range of businesses gives the group any number of levers to pull depending on economic cycles, while Primark is on the way to cementing its place as the company’s jewel in the crown. The shares have certainly enjoyed a strong run of late, having risen by 23% over the last three months, which has helped dampen the disappointment of a previous profit warning and leaves the shares ahead by 3% over the last year, as compared to a hike of 5% for the wider FTSE 100. The market consensus of the shares as a hold reflects uncertainty over the immediate outlook, but for its part AB Foods is currently dodging most of the economic bullets being fired in its direction.
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.