Company Reports

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.

Although we think Associated British Foods' mass apparel retail division, Primark, should deliver consistent growth through its expansion over the short term, supported by reliable performance from the remaining largely commodified food divisions, we believe the company’s potential will be limited over the long term by intense competition and a lack of differentiation, leading to our no-moat rating.

No-moat Associated British Foods, or ABF, reported a trading update for the 16 weeks to Jan. 6 (first quarter of fiscal 2024) with Primark like-for-like, or LFL, sales growth of 2.1%, driven primarily by slightly higher average prices compared with the prior year. LFL sales growth was stronger in the U.K., at 3.8%, given robust sales in the run-up to Christmas. Primark’s market share development was also positive in its home market, posting a 10-basis-point improvement in December compared with the prior year. In Continental Europe, LFL sales were up by 1.3%, with some of the markets experiencing tough economic conditions and facing strong comparatives from the same period of last year. Management expects pricing to be benign for the rest of the year, given soft volumes and continued pressure on consumers’ disposable income.

We increase our fair value estimate for no-moat Associated British Foods, or ABF, by 5% to GBX 2,370 following a solid set of fiscal 2023 results and an increase in our 2024 margin assumptions to 8.8% from 8.2% previously. This is supported by an optimistic outlook from management, guiding for a substantial improvement in profitability for both the sugar and the retail businesses. The share price was up around 7% in intraday trading, leaving shares relatively fairly valued.

Although we think that Associated British Foods', or ABF's, mass-apparel retail division– Primark–should deliver consistent growth through its expansion over the short term, supported by a reliable performance from the remaining largely commodified food divisions, we believe that the company’s potential will be limited over the long term by intense competition and a lack of differentiation, leading to our no-moat rating.

No-moat Associated British Foods, or ABF, reported a fiscal 2023 pre-close trading update with sales for Primark expected to be around GBP 9 billion for the full year (15% reported growth and 9% like-for-like growth) and an adjusted operating margin of 8%. With a strong performance expected for the food division as well, management has renewed confidence in delivering adjusted operating profit ahead of last year for the group. Further, the company shared its first outlook for fiscal 2024, expecting a substantial improvement in profitability for both the sugar and the retail businesses. The stock price reacted favorably to the announcement, up around 6% for the day at the time of writing. We expect we will increase slightly our fair value estimate given the more optimistic expectations for fiscal 2024 once we gain more clarity on the moving parts, along with the annual release on Nov. 7. Our forecast already reflects an improvement in operating margins for the two businesses in fiscal 2024 but only a moderate one. At current levels, we believe shares are almost fairly valued, with around 5% upside remaining to our GBX 2,250 fair value estimate.

No-moat Associated British Foods published a nine-month trading update with group revenue up by 17% year to date and 16% in the third quarter in constant currency. Management also updated guidance for fiscal 2023 adjusted operating profit and EPS, which are now expected to be slightly ahead of the prior year, compared with “broadly in line” previously. We believe this increase in absolute profitability will be mostly driven by the top line as the margin is still expected to be materially below the prior year given the strategic decision to moderate price increases at Primark. We don’t expect this update to be too material to our valuation (which calls for adjusted operating profit in line with the prior year and EPS slightly ahead), and we reconfirm our fair value estimate of GBX 2,250.

No-moat Associated British Foods reported interim results for the 24 weeks to March 4 (first-half fiscal 2023) with constant-currency sales growth of 17% and adjusted operating margin of 7.2% (compared with 9% for the same period last year). The adjusted operating margin fell short of February 2023 preclose trading guidance of around 8% for the fiscal first half, which sent shares down by more than 5% in early trading. Despite this, Associated British Foods reconfirmed its full-year guidance for adjusted operating profit and EPS broadly in line with the previous year, which is aligned with our forecast. We believe this is achievable given the recent normalization of key input costs such as freight and cotton and lower energy costs expected for the second half. Shares have been trading in 3-star territory after a strong recovery in recent months, but there remains more than 10% upside to our fair value estimate of GBX 2,250 after the April 25 correction.

Although we think that Associated British Foods', or ABF's, mass-apparel retail division– Primark–should deliver consistent growth through its expansion over the short term, supported by a reliable performance from the remaining largely commodified food divisions, we believe that the company’s potential will be limited over the long term by intense competition and a lack of differentiation, leading to our no-moat rating.

We are increasing our fair value estimate for no-moat Associated British Foods to GBX 2,250 from GBX 2,200, on account of more-resilient-than-anticipated consumer spending and milder cost inflation during the first half of the fiscal year. We now expect group adjusted operating profit for the full fiscal year of GBP 1,430 million from GBP 1,290 million previously, which is broadly in line with the previous year and the latest management guidance. Our longer-term expectations remain unchanged. Shares have recovered significantly from the lows in early October and now trade in the 3-star territory, although an upside of about 10% still remains in our valuation considering ABF's High Morningstar Uncertainty Rating.

Although we think that Associated British Foods', or ABF's, mass-apparel retail division– Primark–should deliver consistent growth through its expansion over the short term, supported by a reliable performance from the remaining largely commodified food divisions, we believe that the company’s potential will be limited over the long term by intense competition and a lack of differentiation, leading to our no-moat rating.

Associated British Foods, or ABF's, trading update for the 16 weeks to Jan. 7 (first quarter of fiscal 2023) highlighted to us that management's prior-year decision to limit further price increases at Primark—which we previously noted as positive for the chain's market share development over the longer term—has started bearing fruit. ABF reported a particularly strong Christmas period for its retail arm, which outperformed the wider market as Primark's value offering resonated with consumers amidst rising pressure on disposable income.

Although we think that Associated British Foods', or ABF's, mass-apparel retail division– Primark–should deliver consistent growth through its expansion over the short term, supported by a reliable performance from the remaining largely commodified food divisions, we believe that the company’s potential will be limited over the long term by intense competition and a lack of differentiation, leading to our no-moat rating.

A potential repositioning in Germany—Primark's third-largest market by selling space—was one of the key takeaways from no-moat Associated British Foods, or ABF's, full-year fiscal 2022. Otherwise, the update offered little surprise compared to the pre-close announcement shared in mid-September 2022. With both fiscal 2023 guidance and our long-term expectations for ABF largely unchanged, we reconfirm our fair value estimate of GBX 2,200 per share. ABF shares screen as attractive, with the stock trading in the 4-star territory amidst investor uncertainty for the company's disparate business segments and temporary profitability headwinds at Primark.

No-moat Associated British Foods’ fiscal 2022 trading update delivered few surprises regarding the current fiscal year’s results (the 52 weeks to Sept. 17, 2022). However, updated guidance for fiscal 2023 included an expected hit to Primark’s EBIT margin—of a sizable 200 basis points as heady inflationary pressures come to bear on Primark’s cost base near-term—sending shares lower on the day. While we’ve adjusted our fiscal 2023 forecast to reflect the near-term profit squeeze, we maintain our mid-term outlook and our fair value estimate of GBX 2,200. Consequently, we view the share price reaction as excessive. Following share price weakness, Associated British Foods shares screen at an attractive 39% discount to fair value.

A potential change of tack for Primark’s online strategy was a promising takeaway from no-moat Associated British Foods’ fiscal third-quarter 2022 trading update, that otherwise tracked our full-year expectations. ABF announced the launch of a click-and-collect trial for Primark’s children's range in 25 stores of varying sizes in the U.K. Management expects a corresponding uplift in sales from the broader assortment available online and the additional purchase occasions, created when customers pick up orders in store. The jury is out on the economic viability of the model owing to the increased cost of picking and additional deliveries to stores, and the limited scope of the rollout. Nonetheless, we believe it is a step in the right direction strategically as the retailer’s subpar website and lack of online sales could curb its long-term growth potential. ABF shares screen at an attractive 26% discount to our unchanged GBX 2,200 fair value estimate.

Although we think that Associated British Foods', or ABF's, mass-apparel retail division– Primark–should deliver consistent growth through its expansion over the short term, supported by a reliable performance from the remaining largely commodified food divisions, we believe that the company’s potential will be limited over the long term by intense competition and a lack of differentiation, leading to our no-moat rating.

Following a transfer of coverage, we lower our fair value estimate for ABF to GBX 2,200 from GBX 2,560. Although we expect strong top-line growth in the near term as the company's Primark retail segment rebounds from the COVID-19 disruption and continues its expansion, we believe that intense competition and a lack of meaningful differentiation will limit the longer-term like-for-like growth potential and margin opportunities. Shares screen as attractive even after the 14% fair value reduction, having lost 30% of their value over the last year. However, we caution that there are many risk factors that could affect ABF's disparate segments, and we assign ABF a high uncertainty rating.

Following its preclose trading update in February 2022, Associated British Foods, or ABF, reported interim results for the 24 weeks to March 5 (first-half fiscal 2022) with group EBIT of GBP 706 million, of which GBP 414 million was contributed by Primark for an 11.7% adjusted operating margin. Revenue for the group was up 25% (up 28% in constant currency), still about 5% lower than fiscal 2020 levels. Management continues to expect significant progress for the year in adjusted operating profit and adjusted earnings per share for the group, in line with our expectations. Within this though, Associated British Foods now expects a greater reduction in the second-half operating margin for Primark with the full-year margin expected at around 10% versus 11.4% in our model. Similarly, for the group's food businesses, the company now expects a greater margin reduction for the full year due to significantly higher commodity and energy price inflation that takes time to pass on to consumers, with a full run-rate margin recovery expected in the next financial year. We maintain our fair value estimate and no moat rating for Associated British Foods.

Associated British Foods reported its preclose trading update for the 24 weeks to March 5 (first half of fiscal 2022) with Primark like-for-like sales expected to be about 11% below two years ago, and well over 60% versus last year (limited store closures in the first half of fiscal 2022 versus prolonged periods of store closures in same period last year). In the U.K., sales are expected to be 9% below two years ago, with stores in retail parks and town centers continuing to outperform destination city center stores. Like-for-like sales in continental Europe are expected to be 14% below two years ago with total sales below 2% on a two-year basis due to an increase in retail selling space (12%). The U.S. segment continues to fare batter relative to other regions with an expected 2% like-for-like sales growth on a two-year basis and total sales ahead 35%, reflecting new store openings. The company expects Primark to achieve 11% operating margin with inflation on raw materials and supply chains broadly mitigated by a reduction in store operating costs and overheads and a favorable U.S. dollar exchange rate. The company also expects the ex-Primark business (grocery, sugar, agriculture and ingredients) to largely mitigate inflation pressures by year-end through cost savings and pricing (margins expected to be diluted in the first half due to a lag between pricing and cost inflation). Management continues to expect significant progress at full year in adjusted operating profit and adjusted earnings per share for the group, in line with our expectations. We maintain our GBX 2,560 fair value estimate for Associated British Foods. Shares look cheap.