Associated British Foods Earnings: Full-Year Targets Still Achievable Despite Profit Miss

No-moat Associated British Foods ABF 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.

The adjusted operating profit margin for Primark was down by 340 basis points to 8.3% in the fiscal first half following management’s decision to rein in price increases and absorb transitory cost inflation to maintain price leadership and drive volume growth in a period of significant pressure on consumers’ disposable income. We continue to believe this decision is wise for Primark’s longer-term market positioning, and it’s bearing fruit, with the retailer’s U.K. market share increasing to 6.5% from 6.2% in the same period last year, and like-for-like sales up 10% across all geographies.

The food business (grocery, sugar, agriculture, and ingredients) saw revenue climb by 17% at constant currency as a result of strong pricing action. Despite this, operating profit margins are expected to remain depressed for the year given the time lag between recording the impact of cost inflation and subsequent increases in selling prices, as well as substantially depressed U.K. sugar production.