ii view: AB Foods flags a headwind for Primark
While trading remains in line this year, dollar strength will impact Primark over the next 12 months.
9th September 2019 11:58
by Keith Bowman from interactive investor
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While trading remains in line this year, dollar strength is expected to impact Primark over the next 12 months.
Trading update for the 52 weeks ending 14 September 2019
- Full-year outlook unchanged
- Adjusted earnings per share in line with last year
- Year-end net cash up 47% to £900 million
ii round-up:
Associated British Foods (LSE:ABF) is a diversified international food, ingredients and retail group. Employing over 130,000 people, it operates across the five divisions of grocery, sugar, agriculture, ingredients and retail.
The company's clothes business, Primark, generating over 40% of total revenues, has over 350 stores across the UK, Europe and the US.
Group food brand names include Twinings, Ovaltine, Mazzetti, Silver Spoon and Billington's sugars, Jordans and Dorset cereals, Ryvita, Kingsmill, Patak's, Blue Dragon and Mazola.
For a round-up of this trading update, please click here.
ii view:
Factors outside of AB Foods' control such as currency movements can dampen performance, as we've been warned here, but AB is a diverse business which regularly balances out any volatility.
Primark's discounted offering appeals to consumers in an era of low wage growth, while its highly disciplined approach to store expansion remains a strength. Less favourably, environmental concerns around the wider fashion industry's high product turnover require monitoring.
From an investment perspective, the shares trade at a discount to their long-term average, but still at a premium to the sector and offer only a modest dividend yield of around 2%. Stuck in a volatile downwards trend, and with Primark margins expected to suffer next year, AB shares are generating little interest currently.
Positives:
- Diversified business type and geographical footprint
- Primark's discount offering appeals to wage squeezed consumers
- A progressive dividend policy. The interim dividend rose by 3%
Negatives:
- Factors outside of its control - weather, raw material prices and currency movements
- Currency headwinds expected to lower Primark margins next year
- Clothing and fashion industries under environmental scrutiny
The average rating of stock market analysts:
Buy
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