Associated British Foods plc (LON:ABF)’s revenues are expected to grow by 16% in the first half of the year, ignoring the effects of exchange rates. This was driven by a strong performance by Primark where sales are also expected to grow at 16% to £4.2bn. The group stated consumer spending has been more resilient than expected.
Half year underlying operating profit is expected to be broadly in line with last year. Performance in the Food and Ingredients business is set to largely offset weaker performance in the Grocery business.
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Cash outflow is expected to be around £900m, largely due to the dividend and buyback programme, as well as the seasonal inventory build-up in the Sugar business. Net debt, including lease liabilities, is expected to be £2.6bn.
For the full year, underlying operating profit is expected to be roughly in line with last year, which came in at £1.4bn. At Primark, the group remains “cautious” about the resilience of consumer discretionary spending.
The shares rose 2.0% following the announcement.
Associated British Foods Expects Sales To Jump
Aarin Chiekrie, equity analyst at Hargreaves Lansdown:
“Associated British Foods expects group sales to jump up as consumer spending holds up better than anticipated. Primark’s had a big hand in underpinning the group’s increased sales performance, expecting to see double-digit growth as its customers find refuge from cost-of-living pressures in the value retail store.
Despite being well positioned to deal with consumers’ shrinking budgets, ABF is not without its challenges, the main one being significant cost inflation. The group’s trying to offset this through price increases, but this risks alienating the value-chain’s core customer base. This means that cost increases haven’t been fully passed onto customers so far, resulting in Primark’s margins falling from 11.7% to around 8%.
One of ABF’s main strengths is its diversified business portfolio, which includes many well-known food brands such as Kingsmill, Ryvita and Twinings. This diversification helps to mitigate risk and ensures that the company isn’t overly reliant on any one particular product.
In the short-term, inflationary pressures are likely to continue to weigh against profits, but in the longer term, with inflation easing and commodity costs normalising, there’s plenty of room for ABF to restore margins. With the group currently trading well below its long-term average, there could be an opportunity for investors willing to ride out the near-term turbulence.”
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