Associated British Foods third-quarter trading update

After a 55% surge from their autumn lows, shares in Associated British Foods, the owner of Primark, British Sugar, Twinings and Ovaltine, are up by a sixth over the last year.

The shares rally has been fuelled by a rally in the pound, a drop in oil and gas prices (to the potential benefit of consumer spending) and a marked fall in sea freight costs, while there have been no more profit warnings either, after the one dished out last September which drove the shares to a five-year low. The ongoing £500 million share buyback may also be helping, and April’s first-half results were encouraging, as Primark performed more strongly than expected and the food operations proved resilient.

Overall, first-half pre-tax earnings were flat and earnings per share down 3% on an adjusted basis year-on-year, and management nudged up the interim dividend. Chair Michael McLintock and chief executive George Weston left guidance unchanged, and that outlook statement will be important when it comes to how analysts and investors judge this latest update. For the fiscal year to September 2023, management forecast:

• Adjusted operating profit to be “broadly in line” with 2022’s £1.4 billion
• Adjusted earnings per share to be “broadly in line” with 2022’s 131.1p

Source: Company accounts, Marketscreener, consensus analysts’ forecasts. Fiscal year to September

The first number to which analysts will look in this update is revenues. AB Foods generated sales of £4.0 billion in the third quarter of fiscal 2022 and for fiscal 2023 overall the consensus estimate is £19.6 billion, for year-on-year growth of 15%.

Source: Company accounts, Marketscreener, consensus analysts’ forecasts. Fiscal year to September

Attention will then switch to the performance of the different divisions and growth in sales on an underlying and stated basis.

Source: Company accounts

As usual, Primark will probably gather most of the attention. The retail business did better than expected in the first half, thanks to higher footfall, higher volumes and increased prices, while store openings added to the underlying momentum. Management does not wish to push pricing too far and although input cost inflation may be easing, AB Foods believes that Primark’s operating margin in the second half will match the 8.3% made in the first six months of fiscal 2023. That represents an improvement on the 8% generated in the second half of 2022 but a year-on-year decline for 2023 as a whole, although the goal is to get back to 10% over time.

Analysts and shareholders will look for any comment on the Click-and-collect trial across 25 stores in the UK, as Primark dips its toe into online retailing and invests in its website, although physical stores remain the focus and a new 27 openings are due across the estate, with a particular focus on Italy, France, Spain, Eastern Europe and particularly the US. American selling space is set to double in 2023, thanks to three store openings in the first half and five in the second, while a push into the south of the USA is now underway, helped by the opening of a new warehouse and distribution centre in Jacksonville, Florida. The long-term target is to get to 530 stores by September 2026, compared to 408 as of September 2022.

Source: Company accounts. * Numbers before 2013 not directly comparable owing to 2014's IAS19 accounting rules change on employee benefits. ** Numbers before 2019 not directly comparable owing to IFRS16 accounting rules changes on leases. Fiscal year to September

This will be the first set of figures published by AB Foods with Eoin Tongue as its chief financial officer. John Bason retired after more than twenty years in the job at the end of April. AB Foods is not in the habit of publishing detailed cash flows and balance sheet data at this third-quarter stage, but analysts will look for an update on both. The first half saw a net working capital outflow of £703 million, some £400 million more than the long-term average, and Mr Weston and Mr Bason had targeted a big improvement here in the second half, thanks to lower inventory at Primark and also Sugar.

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