Shares in Associated British Foods (ABF) rallied 7.3% to £21.08 on Thursday after the groceries-to-fashion conglomerate assured that trading in its Primark fashion stores which have reopened after lockdown has been ‘reassuring and encouraging’.
Following a third quarter cash outflow, Associated British Foods expects to return to cash generation in the final quarter.
And for the full year, the company continues to expect ‘strong’ adjusted operating profit progress from its sugar, grocery, agriculture and ingredients businesses, mainly driven by another year of good margin and profit growth in the grocery business and a ‘material’ increase in profits at AB Sugar.
LIFE AFTER LOCKDOWN
In an update covering the period from 1 March to 20 June, Associated British Foods reported a 75% third quarter sales slump at discount fashion chain Primark to £582 million, caused by the lockdown and the discount clothing chain’s lack of online sales.
The positive news is that stores have reopened more quickly than expected and trading in reopened outlets has ‘in aggregate been reassuring and encouraging’, albeit with Primark encountering poor sales in big city centres due to the absence of tourism and lower commuter footfall.
All Primark stores were shuttered in March as the COVID-19 pandemic spread, but Primark has recently been reopening stores with social distancing protocols, hand sanitiser stations, perspex screens at tills and additional cleaning of high frequency touch points.
The company said ‘nearly all Primark stores are now trading again and we estimate that, absent a significant number of further store closures, adjusted operating profit for Primark, excluding exceptional charges, will be in the range £300-350 million for the full year compared to £913 million reported for the last financial year.’
While Primark’s like-for-like sales were down 12% over the seven weeks to 20 June, markdowns for the period since reopening have been ‘minimal’.
REASSURINGLY DIVERSIFIED
Elsewhere within Associated British Foods’ diversified business empire, the grocery arm benefited in the third quarter from increased sales through retailers, which more than offset weaker foodservice demand, with brands including Jordans, Dorset, Ryvita and Silver Spoon receiving a demand boost and Twinings Ovaltine revenues ahead of last year.
Third quarter operating profit for the grocery, agriculture and ingredients arms were well ahead of last year and ahead of management expectations, while the sugar business delivered ‘a material improvement in profit in the quarter driven by our European businesses’.
THE SHORE CAPITAL VIEW
Shore Capital reiterated its ‘buy’ rating on Associated British Foods this morning, arguing the group is ‘a high-quality business with a strong brand portfolio, sustained cash generation and well-invested global assets.’
The broker added: ‘Whilst current trading remains severely disrupted, we also continue to see Primark as a highly potent format/fascia/brand that remains immature across many of its Western European markets, and relatively embryonic in North America and Central Europe.’
