Associated British Foods: Confidence in Full-Year Delivery and an Optimistic Fiscal 2024 Guidance

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.

The adjusted operating margin for Primark is expected to be weaker in the second half compared with the first half (when it reported an 8.3% operating margin), as a result of stock losses and restructuring costs in Germany. Here, management is reducing store sizes due to declining sales densities. The 8% full-year adjusted operating margin is slightly lower than the 8.3% in our forecast. On the store estate expansion front, Primark is progressing broadly in line with our expectations, with a guidance of 432 stores by fiscal year-end (431 in our forecast).