Associated British Foods Earnings: Strong Profit Recovery Sends Shares Higher

No-moat Associated British Foods reported solid interim results for the 24 weeks to March 2—the first half of fiscal 2024—with constant-currency sales growth of 5% and adjusted operating margin of 9.8%, compared with 7.2% for the same period last year. The strong improvement in profitability was primarily attributed to a return to more normal conditions in supply chains and the easing of inflationary pressure. All segments contributed to the margin improvement, although market conditions remain challenging for the agriculture segment, which posted a 9% sales decline due to continued soft demand for compound animal feed in China and the UK. Management reiterated its upbeat 2024 outlook for significant growth in profitability and cash generation, now ahead of expectations at the start of the fiscal year. The share price was up around 10% in intraday trading on the back of the solid set of results. We are increasing our fair value estimate by 10% to GBX 2,600 per share after updating our short-term forecast to reflect the faster-than-expected operating margin recovery for the group, as well as a time value of money adjustment. The shares appear fairly valued at current levels.