AB Foods steering a steady course

This FTSE 100 firm's diversified range of income streams allows the group to pull any number of levers depending on the prevailing economic conditions, writes our head of markets Richard Hunter.

Associated British Foods (LSE:ABF) is steering a steady course through the persistent inflationary storms, with Primark remaining a key driver in the group’s recovering fortunes.

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The benefits of the group’s diversified business is also mitigating some of the pressures which wax and wane in any given economic cycle. The Food businesses reported an increase of 23% in revenues and 13% in adjusted operating profit, with a particularly strong showing from the Ingredients unit. This was achieved despite the considerable headwinds generated from lower production in the Sugar business, difficult animal feed markets in the UK and China in the Agriculture arm, and with price increases still lagging inflation in Grocery.

At the same time, AB Foods is committing capital in protecting its various positions. An investment of £527 million will be used to build capacity, open new Primark stores and improve automation and technology where appropriate. The group is also bearing down on costs where possible, as well as passing on some of the price increases caused by the inflationary environment. As a result, both net cash and net debt have worsened for the period, although these are expected to be relatively temporary. The lack of a developed online business at Primark also remains on the to-do list, with incremental improvements still being made to the offering. However, with group revenues ahead by 21% and with a marginal increase in pre-tax profit, AB Foods has continued its steady but complex route to recovery.

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The Primark business remains one which is playing to the audience. Cash-conscious consumers are increasingly looking for value in any discretionary purchases, and Primark remains an obvious destination. The decision not to pass on all of the price increases to customers has had an impact on Primark’s margin, which has fallen to 8.3% from 11.7%, but the ongoing target of 10% remains well in sight for the coming year as a whole. Primark now accounts for 44% of group revenues and 51% of group adjusted operating profit, with an evident determination to raise these ratios.

Primark has been buffeted by the impact of a weak sterling in the period, but profits from its US unit have provided something of a relief. Indeed, further expansion in the US is on the cards, with the brand already gaining traction in the areas where it is trading. At the same time, sea freight costs have normalised and energy costs are declining, all of which suggest that there will be further tailwinds to come.

Within the UK part of the business, footfall has been strong in each of the target areas, namely high street stores, retail parks and destination city stores. The business has clearly been relatively unaffected by its decision to pass on some cost increases, with like-for-like sales increasing by 10% over the period and revenues ahead by 19%.

For the group as a whole, the accompanying outlook comments reflect another six months of likely choppiness, although full-year guidance remains largely unchanged. The group is mindful of the possibility of a decline in consumer resilience given the economic backdrop, while the debilitating effects of inflation are an ongoing battle, even though there are increasing signs that the pressure may be easing.

AB Foods may be an idiosyncratic business, but its diversified range of income streams allow the group to pull any number of levers depending on the prevailing economic conditions. Meanwhile, Primark continues to claim its place as the jewel in the company crown, and international diversification is still being sought to add to its strong UK presence. The share price has responded to the group’s progress, despite some likely profit taking in early exchanges. Over the last year, the shares are ahead by 27%, as compared to a rise of 7% for the wider FTSE 100, which includes a bounce of 55% in the last six months. The potential for further recovery is evident at each of its businesses, although the market consensus of the shares as a hold reflects the fact that this potential has yet to be fully delivered.