AB Foods downplays coronavirus threat, but still falls

As coronavirus fears hammer stocks, our head of markets gives a view on the Primark owner.

Associated British Foods (LSE:ABF) has continued its solid start to the year, although the latest disquieting news on the coronavirus could take some of the sheen off.

As a result of stocking inventories in advance, the Primark business is insured for several months in China in terms of the supply chain. However, supply chain concerns generally remain, and in other parts of the business such as food, some factories are operating at reduced capacity for obvious reasons. 

While the economic effect of the virus remains unquantified and will continue to be so until it is contained, a return to normality seems some way off, and certainly the first quarter of this year will take the initial economic brunt across any number of sectors. In the meantime, a dividend yield of just 1.8% is not particularly punchy even if it is strongly covered.

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The flagship Primark unit accounts for around half of group sales, and, apart from the virus effect, there have been some slightly concerning developments on margins, which could result in a reduced operating profit at the half-year stage and an overall decline in earnings per share. 

That said, a potential levelling out in the UK business is being offset by improving markets in the Eurozone, while aspirations for US penetration remain high, even at these early stages.

Source: TradingView Past performance is not a guide to future performance

Elsewhere, there are positive signs emanating from the grocery business, where margin and operating profit are expected to be ahead at the half-year marker – sales of herbal teas are a particular highlight – and in sugar, which has been an embattled unit but which now may reap some rewards from higher sugar prices and reduced production costs.

At a group level, there has been an improvement in sales growth, and operating profit is also expected to be ahead. The net cash figure is forecast to be around £800 million, significantly ahead of the previous £386 million and, even where there are pockets of weakness across the divisions, there is expected to be a pick-up in the second half of the year, driven especially by Primark and sugar, the net result of which is that guidance is being maintained.

The release of this update comes on a difficult day for the broader market, although over the last year the shares have outperformed the index, with an increase of 11% comparing to a 3% hike for the FTSE 100. 

The emergence of the virus threat is one which investors will be monitoring closely, but prospects for the continued growth of the AB Foods business, particularly the tantalising potential for Primark in the US, are reflected in a market consensus of the shares as a strong buy.