AB Foods bounces back after weathering the storm

It's been a good month for the shares and these annual results justify some investor confidence. Our head of markets runs through the the numbers.

The depth and breadth of the group offering has resulted in an annual performance which has largely defied the difficulties of the wider economic backdrop, boosting Associated British Foods (LSE:ABF) shares in early exchanges.

Unfortunately, September’s profit warning on prospects for next year is still ringing in investors’ ears. An outlook which incorporates further cost inflation, some ongoing supply chain pressures and, in particular, an increasingly cash-strapped consumer all look likely to weigh on the numbers to come.

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Yet this does not detract from this year’s performance, which shows both resilience and strong growth amid a challenging environment. The scope and diversity of the group’s offerings have served it well during previous periods of economic hardship, such as during the pandemic when the other units across AB Foods were able to take over the reins from Primark, which was all but closed for business.

These units have continued to make a strong contribution. Grocery, which accounts for 22% of overall revenues, saw growth of 4%, while Sugar, Agriculture and Ingredients, together accounting for 33% of sales, saw increases of between 12% and 22%.

This comes at a time when Primark has found its feet again. The numbers are now broadly in line with pre-pandemic levels, with sales over this period increasing by 43% to £7.7 billion as shoppers have flocked to its stores. Its operating profit margin of 9.8% is above expectations, while the strength of trading at its UK stores has more than offset a weaker performance in Europe, where consumer confidence has dragged.

AB Foods is mindful of the mood music, and has decided to make no further price increases in its Primark stores in addition to the ones already announced for the next two shopping seasons.

Further out, Primark remains a focus of the group’s further potential success. The digital presence which had been so obviously lacking during the pandemic is now being accelerated, with much of the group’s capital spend diverted towards bringing the offer to something nearer what is required in the retail environment, such as the introduction of a Click and Collect service.

At the same time, the group now considers the foray into the US to have been profitable, and further expansion is planned as the group’s cost-conscious offerings begin to gather some steam. 

For the group as a whole, there had been some concerns that the previous profit warning might put the final dividend in doubt. AB Foods has brushed aside such concerns, increasing the dividend to what is a projected yield of 4% including specials, while the announcement of a £500 million share buyback programme not only lends some support to the share price, but is a prudent use of excess capital. This has been made possible by the strength of trading for the year.

Revenues rose by 22% to £17 billion which was above expectations, while adjusted operating profit and pre-tax profit spiked by 42% and 48% respectively. The ability to pass on some costs, particularly within the Foods business, has enabled the group to have shored up its position ahead of the challenges to come.

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These impending challenges have overshadowed the group’s current strength. Further increases in the likes of energy prices, coupled with a strong dollar which has affected the costs of buying products from Asia have inevitably had an impact. Indeed, the group overall estimates that costs of some £1 billion can be attributed to inflationary pressures. As such, the share price has suffered not on current performance but on the uncertainty of next year.

The shares have fallen by 24% over the last year, in comparison to the FTSE100 which is unchanged over that period, while the market consensus has also drifted lower in view of the previous warning. The general view now stands at a 'hold', with the ball now in the company’s court to prove that it can weather a new storm successfully as it has done in the past.