ii view: AB Foods shares keep rising after latest update

Covid is hurting Primark, but there is now light at the end of the tunnel.

AGM trading update 

ii round-up:

Associated British Foods (LSE:ABF), the owner of clothing chain Primark, today raised its estimate of the expected sales loss under pandemic lockdowns and store closures to £430 million from £375 million previously.

However, it continues to expect Primark sales and profit to be higher in the year to September 2021 compared to last time. Trading for its other grocery, sugar, ingredients, and agriculture businesses is also running ahead of both expectation and last year at this early point in the new financial year.

AB Food shares rose by more than 3% in UK trading, narrowing their year-to-date decline to under 10%. Shares for rival UK high street operators Next (LSE:NXT) and Marks & Spencer (LSE:MKS) are down by 3% and 33% respectively.

Sales have been strong in recent days following the reopening of Primark stores across England, Ireland, France and Belgium. A total of 34 stores remain temporarily closed, including all stores in Northern Ireland and Austria, representing 7% of its total retail selling space. Down from 62% at the height of closures during November.

In the US, the performance for both new stores opened and recently reopened stores under Covid disruptions had proved very encouraging. Underpinning management confidence in in the acceleration of its US store opening programme.

In Europe, it reported a very strong customer response to its first store in Rome, Italy, while recent openings in Spain brought the total there to 50. Leaving its overall store number at 389 or 16.5 million square feet.  

A post-Christmas trading update is due on 14 January.

ii view:

Operating across the five divisions of grocery, sugar, agriculture, ingredients and retail, AB Foods employs over 135,000 staff in more than 50 countries. Company 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. 

Diversity of its business divisions and geographical location help Associated British Foods balance out volatility caused by factors outside of its control such as food commodity prices, currency movements or a pandemic. This trading update again evidences the point. Weak pandemic sales under Primark store closures are to some degree being counterbalanced by improving trending at its food related businesses. 

For investors, possible further Covid disruption to its Primark stores should generate some caution, as should the exact shape of the UK’s Brexit deal and its full implications. The current suspension of the dividend payment under Covid-19 also removes an attraction. And environmental concerns around Primark and the wider fashion industry’s high product turnover are also worth pondering. That said, the pending rollout of a vaccine should help lift uncertainty for Primark, its ongoing expansion in the US and Europe offers growth longer term, while adjusted operating profit for its food businesses rose by 26% over the last financial year. In all, AB shares look to remain worthy of long-term investor consideration. 

Positives: 

• Diversified business type and geographical footprint
• Primark expanding store numbers overseas

Negatives:

• Ongoing pandemic uncertainty 
• Suspended dividend payment

The average rating of stock market analysts:

Buy