Today’s results reveals a very strong year for Associated British Foods (ABF), fuelled by the ever-popular Primark brand and a huge improvement in sugar profits. After raising full-year profits guidance in September, ABF has come in at the top of expectations.

Sales at Primark were 19% ahead of last year at actual exchange rates and 12% ahead at constant currency. Although strong this was a little short of the 20% and 13% figures expected in the Q3 update. 

Nevertheless, Primark sales look pretty well bullet proof. Signs of a softer retail market should not pose too many problems, albeit the results don’t include some of the weaker retail sales seen through September and October. We must note that non-food sales in the three months to October grew at the weakest pace on record. Whatever the economy is like, Primark is recession proof - if consumer spending is slowing, Primark is the sort of brand that benefits.

Profits rose +3% at constant fx to £735m, accounting for half of ABF profits for the year. Strong UK sales (+10%) were supported by solid expansion in Europe (+16%).

At the same time it continues to build out its presence in the US, but it’s slow progress. As any artist will tell you, cracking the US is tough. And as far as the US push goes, management says it has ‘learned much’ and is doing lots of ‘fine-tuning’. Three stores are set to be reduced in size for ‘efficiency’. The British invasion is as a beachhead but little else after two years.

The weak pound remains a problem with ABF reporting that operating profit margin at Primark declined from 11.6% to 10.4% as a result of US dollar input costs. Margins in the first half of the current trading year are expected to be hit most of next year's UK purchases were contracted at a weaker sterling/dollar exchange rate than the period for comparison last year. This is unchanged from the Q3 update, when we noted that due to the timing of forward contracts and hedges, dollar strength will hit Primark in the first half, with euro strength will offset this in the second half. However this will be offset by a stronger euro/pound exchange rate. Euro strength has also booted British Sugar margins.

Meanwhile Sugar is in something of a sweet spot. Higher EU sugar prices and lower UK beet costs left Sugar profits soaring – a whopping 374% at constant fx higher than last year’s £35m to £225m. Margins jumped from 2.1% in 2016 to 10.3%.
An ‘abnormally low’ level of production (900,000 ts) in 16/17 helped but this will rise in 17/18  to around 1.4m ts. The high EU prices are also set to fall but again the weaker pound versus the euro should help.

In the Q3 update management guided grocery sales are expected to be flat with profits lower. In the event, constant fx profits were -6% lower and margins declined slightly to 9%. At actual fx profits were +3% at £303m.

Part of the reason for this seems to be the proliferation and popularisation of supermarket own brand goods. In particular own-label brands are the staple of the likes of Aldi and Lidl which are growing market share in the UK, which appears a net negative for ABF as they prefer to stock their own goods.

Cash position looks a lot healthier thanks to the sale of the south China sugar and US herbs & spices businesses, which brought in £477m after tax, including debt disposed. Combined with higher earnings the net cash position  at £673m is a little better than forecast (c£650m) and compares with net debt of £315m last year.

ABF is proposing a final dividend a final dividend of 29.65p, taking Fy divis to 41p. Dividends look very well covered - on an adjusted basis cover increased to 3.1 times. Even the pension scheme is looking in good shape, with the scheme in surplus by £126m at the year-end compared with a net deficit last year of £303m.


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