Associated British Foods Earnings: Stock Up Amid Strong Revenue Growth and Optimistic Profit Outlook

We increase our fair value estimate for no-moat Associated British Foods ABF, 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.

The decision to absorb some of the transitory cost inflation at Primark in order to maintain the retailer’s characteristic low prices in times of pressure on disposable incomes appears to have paid off for ABF. Primark reported like-for-like sales growth of 8.5% in fiscal 2023 and continued to gain market share in the U.K. Still, higher input costs weighed on the retailer’s operating margin that ended the year at 8.2%, around 160 basis points lower than the previous year. Management expects Primark’s operating margin to recover to above 10% in fiscal 2024, supported by input cost normalization in areas such as freight and material costs. Like-for-like revenue growth is expected to be more muted (2% in our forecast). Still, we expect total revenue growth of around 7% for Primark, driven by further expansion of the store network. Our forecast calls for an additional 25 store openings in fiscal 2024, one more than the total number of stores opened in the last year.

Sugar revenue was up by 29% in constant currency, supported by high sugar prices. This was despite an 8% fall in total production as a result of adverse weather in Europe. The operating margin was down by 140 basis points on account of higher costs for beet, cane, and energy as well as the need to buy and import sugar to make up for the extraordinarily low British sugar production. For the next fiscal year, management expects a substantial improvement in profitability primarily driven by a normalization in British sugar production.