ii view: reason for optimism at AB Foods as Primark thrives

Full-year trading update to 16 September

• Expects current full-year retail or Primark revenue up 15% year-over-year to £9 billion
• Now expects current full year food related adjusted operating profit to be strongly up
• Share buybacks of £442 million of the £500 million programme completed

Guidance:

• Now expects Primark’s adjusted operating profit margin to recover strongly in the financial year ahead
• Continues to expect Sugar to make a substantial improvement in profitability in the next financial year 

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. 

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Brands for its food businesses include Silver Spoon, Twinings, Ryvita, Kingsmill, Allison’s, Jordans and Dorset cereals, Patak’s, Rajah’s and Blue Dragon.

For a round-up of this latest trading update announced on 12 September, please click here. 

ii view:

Started in 1935, AB Foods is today a multinational food processing and retailing business headquartered in London. Primark competitors include Tesco (LSE:TSCO) and Sainsbury (J) (LSE:SBRY) selling their own clothing ranges, and the likes of Next (LSE:NXT)and Marks & Spencer Group (LSE:MKS). Food sector rivals include Tate & Lyle (LSE:TATE) and Premier Foods (LSE:PFD). A constituent of the FTSE 100 index, AB Foods employs over 130,000 staff in more than 50 countries. Trading from around 430 stores in the UK and overseas, 57 UK outlets are now trialling its Click + Collect service. 

For investors, the challenging economic backdrop including high interest rates cannot be forgotten. Food production such as sugar can prove vulnerable to the weather, while the social and environmental impact of clothing manufacture warrants consideration. So does the lost ground Primark needs to recover on rivals such as Next in relation to its online sales offering. 

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On the upside, easing cost headwinds over the next financial year are expected to help boost Primark profits. The company enjoys both diversity of business type and geography, with new stores, including four recent openings in the USA, being pursued. A push online also continues, while a price-to-net asset value below the three-year average suggests the shares are not expensive.   

For now, and despite ongoing risks, a relatively defensive offering of food and budget clothing is likely to remain attractive.  

Positives: 

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

Negatives:

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

The average rating of stock market analysts:

Strong hold