ii view: sugar sweetens fall at Primark for AB Foods

Primark profit is expected to fall dramatically but reopening sales have been encouraging. 

Trading update for the 40 weeks to the 20 June

• Group revenue down 13% to £10.25 billion
• Retail or Primark sales down 27% to £4.29 billion
• Grocery sales up 3% to £2.63 billion

Guidance:

• Full-year (FY) material increase in sugar profit
• FY Primark profit between of £300 to £350 million expected, down from £913 million

ii round-up:

Associated British Foods (LSE:ABF) is a diversified international food, ingredients and retail group. 

Employing more than 135,000 people in over 50 countries, it operates across the five divisions of grocery, sugar, agriculture, ingredients and retail. 

The company’s retail business, Primark, has over 370 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 latest trading update, please click here. 

ii view:

Diversity of its business divisions and geographical location help Associated British Foods balance out volatility in food commodity prices such as sugar or currency movements – factors outside of management’s control. A 5% decline in full-year 2019 sugar revenues was largely neutralised by a 4% gain in ingredient sales. 

Europe & Africa generate just over a third of group revenues, as does the UK. The balance is split between Asia and the Americas. Primark's discounted offering appeals to consumers battling tough economic times across the UK, Europe and the US. News of encouraging sales following a near full reopening of its stores is clearly welcome. In its last full financial year, the retail business generated almost half of total group revenue. 

For investors, the scrapping of the half-year dividend payment back in April was disappointing if arguably sensible given the corona crisis.  Environmental concerns around Primark and the wider fashion industry’s high product turnover are also worth remembering. But AB Foods remains a well-managed business with room to expand Primark. For now, and despite a still uncertain outlook, its shares remain worthy of long-term consideration. 

Positives: 

• Diversified business type and geographical footprint
• Expecting a material increase in full-year profit at its sugar business

Negatives:

• Primark profit expected to be around a third of last year’s
• No half-year dividend payment

The average rating of stock market analysts:

Buy