ii view: AB Foods blames gloomy numbers on sugar and weather

Second-half trading update 

Chief executive George Weston said: 

"The Group has continued to perform well in the second half, delivering good top line growth, a significant improvement in profitability and excellent cash generation.

“Notwithstanding this short‐term volatility in Sugar, we are optimistic about the outlook for the rest of the Group, which is well positioned for further strategic progress supported by continued reinvestment for the longer term."

ii round-up:

Food maker and owner of the Primark fashion chain Associated British Foods (LSE:ABF) today detailed second-half trading shy of City forecasts, hurt by reduced sugar prices and poor weather which affected clothes sales. 

Increased supply and set production costs are now expected to generate a full-year 2024 adjusted sugar profit of £200 million, less than the £248 million pencilled in by analysts. Sugar profit for 2025 is now tipped to be around £50-75 million compared with a City forecast of £239 million, before normalising to around £200 million come 2026.  

Shares in the FTSE 100 company fell 5% in UK trading having come into this latest news up around a quarter over the last year. That’s similar to food maker Premier Foods (LSE:PFD) and below a 42% gain for Tesco (LSE:TSCO). The FTSE 100 index is up 11% over the last year. 

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AB Foods operates across the five divisions of sugar, retail, grocery, agriculture and ingredients. Food related brands include Silver Spoon, Twinings, Ovaltine, Ryvita, Kingsmill, Allison’s and Patak’s.

Poor summer weather in the UK and Ireland is expected to see Primark's fourth-quarter same-store sales reduce by 0.9% year-over-year compared to analyst forecasts for a gain of 1.6%. 

However, annual adjusted profit at Primark is expected to remain broadly unchanged in 2024, with profit margin on sales aided by reduced material costs, lower freight charges and improved foreign exchange rates.

Elsewhere, second-half profitability for grocery is expected to be slightly ahead of management’s previous forecasts, with both ingredients and agriculture broadly inline. 

Management hopes for the 2025 financial year point to good sales growth for Primark given continued new store openings, with profit margin similar to 2024. 

The City currently expects overall group 2025 profit to be trimmed by high single digits. Results for the 12 months to 14 September 2024 are scheduled for 5 November.  

ii view:

Founded in 1935, AB Foods today employs more than 130,000 people across 55 different countries. Primark generated its biggest chuck of revenues in 2023 at 46%, followed by grocery at 21%, sugar 13%, ingredients 11%, and agriculture the balance of under 10%. Primark sells across the UK and Ireland, much of Europe and parts of the USA. The 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 division is focused on yeast and enzymes. 

For investors, unseasonal weather and its potential impact on the sugar and retail businesses cannot be overlooked. Supply chain challenges for many industries warrant consideration.  The impact of clothes generally on the environment given the amount of water used to produce garments deserves thought. So does the lost ground Primark needs to recover on rivals such as Next in relation to its online offering.

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To the upside, new Primark store openings continue, aiding anticipated second-half sales growth in Europe and the US at 5% and 25% respectively. Previously increased Primark product prices and broadly easing cost headwinds are aiding profit margins. Robust US sales of brands such as Twinings for its grocery business are underpinning profit potential, while a forecast dividend yield of around 2.7% is above forecasts for both Next and M&S.

For now, and despite clear risks, a mix of relatively defensive food sales and exposure to low-cost fashion at a time when consumer budgets are under pressure, should be enough to maintain interest in this well managed FTSE 100 company.  

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