ii view: Primark profit a tailwind at AB Foods

Trading remains inline at fashion retailer and foods group AB Foods. Primark still sweeter than sugar?

Trading update for the 40 weeks ending 22 June 2019

• Revenue from continuing businesses up 2%
• Excluding sugar, sales grew by 4%
• Full-year outlook unchanged
• Adjusted earnings per share expected to be in line with last year

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. 

Group brand names include Twinings, Ovaltine, Mazzetti, Silver Spoon and Billington's sugars, Jordans and Dorset cereals, Ryvita, Kingsmill, Patak's, Blue Dragon and Mazola. 

Its retail business Primark, which generates over 40% of total revenues, has over 350 stores across the UK, Europe and the US. 

AB's latest update points toward unchanged expectations for the full year. Adjusted earnings per share are forecast by management to be similar to last year.

Sales for Primark again made progress, rising by 4% on new store openings, although same store sales were dragged lower by unseasonal weather. Operating profit margin rose to 11.7%, from 9.8% a year ago, aided by better product buying, currency movements and tight stock control.

Both its grocery and ingredients businesses fared well, although for the sugar business, and despite some recent improvement, difficulties in the first half were expected to drag on full-year performance.  

ii view:

Factors outside of its control such as the weather can dampen performance, but AB is a diverse business which regularly balances out any volatility. Primark's discounted offering also hits the mark in an era of ongoing austerity. A highly disciplined approach to expansion and store space remains a strength, too. Environmental concerns around the high product turnover in the wider fashion industry are unhelpful, but, from an investor perspective, a price earnings (PE) multiple at a marginal discount to the 10-year average offers some encouragement. 

Positives: 

• Diversified business portfolio
• Store expansion and competitive product buying aid profits at Primark
• A progressive dividend policy. Interim dividend rose by 3% 

Negatives:

• Factors outside of its control - weather, raw material prices and currency movements - can impact    
• Management have expressed concerns about Brexit 
• Clothing and fashion industries under environmental scrutiny

The average rating of stock market analysts:

Buy