A leading analyst has suggested that Associated British Foods's investors may be starting to worry about the group's reliance on its Primark fashion chain to offset declines at its sugar arm.
AJ Bell investment director Russ Mould was commenting as AB Foods issued a trading update in which it said that it expected Primark's full-year sales to be 5.5% ahead of last year at constant currency levels, driven mainly by increased selling space. Like-for-like sales are expected to be 2% lower, however.
“Investors may be getting worried about the ongoing ability of Associated British Food’s Primark business to get the rest of the company out of trouble," Mould wrote.
“Amid a warning of a £20m currency hit to full year profit from currency movements and of lower operating cash flow the company left its full year guidance unchanged in terms of its adjusted performance – stripping out the impact from foreign exchange."
Fly In The Ointment
The main "fly in the ointment" according to Mould is the group's Sugar business, which AB Foods said was likely to be 'well down on last year due primarily to significantly lower EU prices adversely affecting our UK and Spanish businesses'.
"The sugar division [...] is being hit by the pressure on prices in the European Union which currently enjoys a supply glut," Mould said.
“Budget clothing retailer Primark continues to do well and appears to be a beneficiary of shoppers trading down with sales in the UK up 1.5% on a year-on-year.
“However, it may be asking too much for this part of the business to always come to the rescue given the pressures on traditional retail."
He added that the "relatively downbeat guidance" for this part of the group "confirms this point".
Elsewhere, Davy Stockbrokers said that the latest update from AB Foods suggests that Primark will post a weaker fourth quarter in like-for-like terms, led by Northern Europe.
'On first look, we anticipate downward revisions to our FY 2019 forecasts, which will be Primark led (both LFL and margin),' it said.
Optimistic View
Aside from Sugar and Primark, Associated British Foods is relatively upbeat about its Grocery and Ingredients divisions.
It expects its Grocery arm, which includes brands such as Twinings, Ovaltine and Kingsmill, to post revenue 'well ahead of last year', with adjusted operating profit set to be 'well ahead'.
In addition, revenues at its Ingredients business will be 'ahead of last year and operating profit will again be well ahead with a further increase in margin', the company said.
© 2018 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.
