Associated British Foods has issued a trading statement to say that it expects sales growth in all divisions, apart from Sugar, in the first half of its financial year, with its Primark retail operation expected to be 4% up on the previous year.
Here's how leading industry analysts viewed its performance:
Darren Shirley, Shore Capital
"ABF has issued a solid pre-close trading update for the 24 weeks to 2nd March, with no surprises and little change from the most recent update on 17th January. The key feature of the statement is the unchanged outlook, in our view, with management continuing to expect adjusted EPS to be “in line with last year”.
"ABF is expecting to end the H1 period with net cash of £300m (from £123m a year ago), down from the year-end position due to seasonal working capital movements. We continue to forecast net cash of £994m at the FY2019 year-end, building by c£500m per annum thereafter. ABF has a very strong balance sheet and cash flows that provide a considerable resource to support future growth ambitions, whether they be organic or corporate.
"So, overall a solid update from ABF, in our view, with few if any surprises, leading to unchanged financial expectations for FY2019 and beyond. We see a PER of 16.7x and an EV/EBITDA multiple of 8.4x as an attractive entry point into ABF (implying a Primark PER of 14.5-15.0x from our SoTP, which is particularly attractive in our view)."
Russ Mould, AJ Bell
“Overall there are no major shocks from Associated British Foods’ trading update which is exactly what the market currently wants from someone exposed to the fragile retail sector.
"Although Primark isn’t immune to consumer spending weakness, fortunately it hasn’t experienced a large downturn in trading and is managing to keep its chin up in a difficult market. However, it is disappointing to see that Germany continues to be a real problem for the business.
“While the troubles aren’t ‘new’ news, it seems odd that the proposition isn’t resonating with this geographical segment of shoppers. The fact that the country is experiencing economic weakness should really play to Primark’s strengths given its low pricing point. More encouraging is progress in the US which has traditionally been a tough market for British companies to crack."
Robert Waldschmidt, Liberum
"ABF offers investors compelling exposure to secular growth trends in retail over the next 10 years. We expect Primark to take market share and drive double-digit sales growth in FY19-25E, backed by visible new space additions of 1.0-1.2m sqf pa.
"We expect Sugar profits will trough in FY19 and start to recover from FY20. Lower EU production volumes should clear excess stocks while further cost savings help to offset lower EU sugar prices. Excluding M&A and store parcels, we estimate ABF will deliver 7% adj. EPS CAGR over FY18-23E. A conservative balance sheet offers further opportunity for strategic investments in (i) store parcels for Primark (ii) Sugar and (iii) selected grocery acquisitions."
Kate Ormrod, GlobalData
‘‘Like-for-like revenue growth remained a challenge for Primark in H1, with physical expansion, at 0.3 million sq ft, the sole reason for its 4% growth forecast in the first half of FY2018/19. While on a positive note H1 profit is expected to have excelled compared to the prior year, owing to tighter stock management and buying in at a weaker US dollar rate, the first half has proved tough for the retailer, not least owing to difficult trading in November.
"At home trading improved in Q2, with H1 growth now double that achieved in the first quarter of the year, and while the retailer highlights that cumulative like-for-like sales have improved since its Q1 update in January, overall H1 like-for-like growth still eludes the value giant. Primark possesses a winning formula of low prices and fast fashion affording it strong brand appeal, however given that it cannot rely on online operations to act as a crutch as many other players continue to do, Primark must drive loyalty and basket sizes in a bid to reverse its like-for-like sales decline.''
Barclays European Food Retail Equity Research
"ABF's H1 pre-close update confirms an unchanged outlook for the year. H1 profits are expected to be slightly below last year with EPS in line helped by lower net finance costs. We see Primark's LFL in Q2 of c.-0.7% slightly ahead of consensus, with four key positives (1) A continued impressive Primark UK performance, flat in H1; (2) Continental European LFL decline rates improving with positive trading in Spain, Italy, Belgium and France (Germany still difficult); (3) Positive US Primark trading, we estimate +8% LFLs in H1; and (4) A strong Primark margin performance where we now expect 1H margin up +190bp (vs +150bps previously) and FY19 margins +30bps (unchanged).
"We leave our estimates broadly unchanged and reiterate our OW rating, with the shares trading well below our SOTP/DCF price target and still not discounting any value for the potential of Primark US or its better margin outlook."
© 2019 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.
