Associated British Foods Trading Update – What The Analysts Said

By Steve Wynne-Jones
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Associated British Foods Trading Update – What The Analysts Said

Associated British Foods has said in a trading statement that it expects sales and adjusted operating profits for the first half to be ahead of the corresponding period last year, however it warned of the potential impact of coronavirus on stocks at its Primark business.

'We expect strong growth in adjusted operating profit in the second half, driven by profit growth for Primark and a second half weighting of the AB Sugar profit recovery,' the company said.

Here's how leading industry analysts viewed its performance:

Darren Shirley, Shore Capital

"ABF has issued a reassuringly inline trading update for the 24 weeks to 29th February. Whilst coming a little over five weeks since the January update it should be no surprise that expectations for the year remain unchanged. We are pleased that whilst remaining vigilant management is not guiding to a profit impact from the ongoing COVID-19 events in China.

"As such, management has reiterated it expects 'progress on both a reported and lease-adjusted basis' in adjusted EPS and we leave our forecasts unchanged at CPTP of £1510m, EPS of 145.6p, no changes to consensus are anticipated by us.


"We view ABF as a high-quality business across its categories, with strong medium-to-long term growth prospects underpinned by sustainable cash generation, very well-invested assets and a strong brand portfolio. In addition, we see Primark and being immature across many of its existing markets and with an adapted store model it is accelerating growth in the USA, whilst it’s medium term ambitions and commitment to Central and Eastern Europe expansion are becoming increasingly apparent."

Russ Mould, AJ Bell

“The ongoing threat from coronavirus stalks the first-half trading update from Primark-owner Associated British Foods. For now its discount clothing chain is unaffected by the outbreak, but stockpiling ahead of the Chinese New Year will only take the company so far.

“Guidance for Primark’s profit to be down in the first six months of its financial year, despite an increase in revenue, is a reminder of the tight profit margins for this part of the business and how important it is to maintain volumes.

“This makes the Chinese supply chain risk a potentially serious one. The company and its shareholders will hope proposed contingency plans, including stepping up output from suppliers in other regions, are effective, should they be required.


“There are encouraging signs for Primark’s expansion in Europe but another factor to watch with the coronavirus is the extent to which its spread affects retail footfall. Primark is heavily reliant on getting shoppers through the doors as it has a minimal online presence.

“For now the health crisis is affecting the more unsung parts of the group like bakery ingredients, milk flavouring brand Ovaltine and agri-food which are operating at reduced capacity in China.”

Katy Hutchinson, Davy

"Associated British Foods’ pre-close statement points to a solid first half, led by strong trading in Primark’s eurozone markets and the continued rebuild in Sugar profits. Management’s bullish tone on Primark US continues. Further evidence of the recovery in Germany will be well-received. Wider concerns over the impact of coronavirus (sourcing) may weigh on the equity in the near term."

Adam Tomlinson and Anubhav Malhotra, Liberum

"ABF offers investors compelling exposure to secular growth trends in retail over the next 10 years. We believe there is significant scope for the Primark business to expand into Central and Eastern Europe and the USA, and this is not reflected in the share price. Primark’s customer proposition of the latest fashion at value-for-money prices, sold at large well-managed stores located in high street and shopping centres allows it to outperform the market, particularly at these times of political and macro uncertainty when consumer is keeping its expenditure in check.


"In our view, Primark remains well positioned to take market share and drive mid to high-digit sales growth in FY19-23E, backed by visible new space additions of c.1m sqf p.a. primarily on the Continent and in the US.

"The overhang from the Sugar business gets removed this year as the reduction in sugar stocks in Europe has led to higher spot prices. The often-underappreciated Grocery business continues to execute well, growing sales and expanding profits. Excluding M&A and store parcels, we estimate ABF will deliver 8% adj. EPS CAGR over FY19-24E. A conservative balance sheet offers further opportunity for strategic investments in (i) store parcels for Primark (ii) Sugar and (iii) selected grocery acquisitions."

Pippa Stephens, GlobalData

"With over half of Primark’s suppliers located within China, the retailer has warned that if the coronavirus outbreak persists, its stock may be affected later in the year, though it expects little short-term impact. While Primark must accelerate its efforts to shift production to existing factories within other regions to mitigate the risks of long-term factory closures, it must ensure that any cost price increases are not passed on to the consumer, as this will jeopardise its value appeal.

"It should also seek new suppliers where possible; however, it may struggle to easily find factories that have the capacity to meet the large bulk orders it places to fulfil its huge estate. Primark should also ensure it demonstrates transparency around any changes to its supply chain, as consumers are often concerned that the manufacturing of its cheap products may not be ethical.''

© 2020 European Supermarket Magazine – your source for the latest retail news. Article by Stephen Wynne-Jones. Click subscribe to sign up to ESM: European Supermarket Magazine.

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