Interactive Investor

ii view: AB Foods in a sweet spot

Opening new Primark stores in the US and Europe and a giant of the sugar world producing 3.5 million tonnes every year. Buy, sell, or hold?

5th February 2024 11:02

Keith Bowman from interactive investor

First-quarter trading update to 6 January

  • Total currency adjusted group revenue up 5.4% to £6.9 billion
  • Primark related currency adjusted revenue up 7.9% to £3.37 billion
  • Grocery related currency adjusted revenue up 5.4% to £1.4 billion
  • Sugar related currency adjusted revenue up 13% to £825 million

Guidance:

  • Looking forward to a year of meaningful progress in both profitability and cash generation

ii round-up:

Associated British Foods (LSE:ABF) operates across the five divisions of grocery, sugar, agriculture, ingredients, and retail. 

Its retail business Primark is located in the UK and Ireland, much of Europe and parts of the USA. 

Food brands include Silver Spoon, Twinings, Ovaltine, Ryvita, Kingsmill, Allison’s, Jordans and Dorset cereals, Patak’s, Rajah’s and Blue Dragon.

Its sugar business is the largest producer in Iberia, the sole processor of the UK’s sugar beet crop and the biggest processor in Africa, as well as running operations in Eastern China. The ingredients business is focused on yeast and enzymes.

For a round-up of this latest trading update announced on 23 January, please click here

ii view:

Started in 1935, this FTSE 100 company today employs more than 130,000 people across 55 different countries. Its Primark retail business trades from over 430 stores, with competitors including Next (LSE:NXT) and Marks & Spencer Group (LSE:MKS), and Tesco (LSE:TSCO) and Sainsbury (J) (LSE:SBRY) who sell their own clothing ranges. Food sector rivals take in players such as Tate & Lyle (LSE:TATE) and Premier Foods (LSE:PFD).

For investors, unseasonal weather and its potential impact on clothing demand and production for its sugar business should not be ignored. Potential supply chain disruption from events in the Red Sea could also increase Primark's costs, and the impact of clothes generally on the environment given the amount of water used to produce garments warrants consideration. So does the lost ground Primark needs to recover on rivals such as Next in relation to its online sales and offering. 

More favourably, previously increased product prices and broadly easing cost headwinds are expected to help boost Primark profits this financial year. New store openings continue along with a push online, robust US sales of brands such as Twinings for its grocery business also add to full-year profit potential. A forecast dividend yield of around 2.7% is also better than both Next and M&S. 

On balance, and despite ongoing risks, AB Foods is likely to remain a popular investment choice given a mix of relatively defensive food sales and exposure to budget clothing during a cost-of-living crisis.

Positives: 

  • Diversified business type and geographical footprint
  • Expanding Primark store numbers

Negatives:

  • Uncertain economic outlook
  • Factors outside of its control like food commodity prices and currency moves 

The average rating of stock market analysts:

Strong hold

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