Primark powers AB Foods past forecasts

For the year as a whole, this is an unquestionably strong set of results from Associated British Foods (LSE:ABF) which highlight both the benefits of diversification as well as the continuing engine of growth which is Primark.

It has not all been sweetness and light, however. Ample supply has driven down sugar prices and therefore profitability, a situation which is likely to last well into next year. By the same token, the Sugar business accounts for 13% of overall group sales and the group’s sprawling business model has been able to compensate for this weakness elsewhere. Poor weather also hamstrung sales at Primark in the second half of the year, and taken together these two factors have led to a decline of 14% in the share price over the last six months.

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Indeed, an unusual feature of the group is its diverse range of activities, which allows not only for business and geographical diversification, but also for various units to pick up some of the slack elsewhere depending on the economic cycle. This was of particular benefit during the pandemic when Primark was all but shuttered, and now that the retail arm is truly back on track, most of the other units are making separate and additional progress.

Grocery for example, which accounts for 21% of overall sales, saw revenue and adjusted operating profit growth of 4% and 17% respectively over the period, driven by higher volumes and the effects of previous price increases which are now washing through. 

However, the bulk of the business in terms of contribution and prospects is clearly the Primark arm, which continues to appeal to cost-conscious consumers in central locations, with incremental improvements to its online presence offering further choices. Primark now accounts for 47% of group sales, and saw revenue growth of 6% to £9.4 billion. Meanwhile, adjusted operating profit saw a significant increase of 51% to £1.1 billion and is now responsible for 55% of the group total. 

At the same time, the closely watched margin figure also saw strong improvement, rising to 11.7% from a previous 8.2% due largely to reduced freight and material costs, allowing for further investment in the business. The store rollout programme continues apace in Europe and the US, and the latter saw sales growth of 30% over the period. Although the US business is still in its fledgling stage, accounting for 5% of group revenues, the potential for growth is evident as the group focuses on investment and marketing to lift brand awareness in what could be a major opportunity.

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The online presence is also receiving attention from the group, and there are now 87 stores where the Click & Collect service is available, and the stock checker facility is seeing significant growth. While the online offering is far from the finished product as seen at many of its competitors, it is part of a two-pronged approach whereby physical stores remain a top priority for the group.

The success of the year as a whole is plain to see from the key metrics.

At a group level, revenues increased by 2% to £20.07 billion, and adjusted operating profit by 32% to £1.998 billion, against expectations of £1.955 billion. Similarly, adjusted pre-tax profit of £1.957 billion beat estimates of £1.91 billion and represented growth of 33% on the previous year.

The significant growth in profits improved free cash flow to £1.355 billion from a previous £269 million, while also enabling a reduction in net debt from £2.265 billion to £2.021 billion, while the return on capital employed spiked to 18.1% from 13.6%.

Strong cash generation has also led to a new share buyback programme of £500 million, as well as an increase of 50% to the total dividend for the year including specials, which gives a projected yield of 3.9%, rather higher than has been the case in recent times.

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Despite the blip of the last six months, the share price is ahead by 8% over the last year, as compared to a gain of 10.3% for the wider FTSE100 and has now spiked by 61% over the last two years. The warm reaction to these numbers in early exchanges is further vindication of a well-balanced and enticing growth strategy and, given a valuation which remains undemanding by historical standards, the market consensus of the shares as a hold could well be upwardly revised.