Primark’s continued success can’t sugar coat a weak outlook for their owner.
AB Foods’ share price tumbles despite revenue growth
- Associated British Foods reported a mixed bag as Primark continues to grow but the sugar business struggles
- Full year guidance was left unchanged as the shares dropped 4% in early morning trading
- We continue to recommend Primark as a ‘hold’ for investors willing to accept a medium level of risk
This morning we have had a third quarter trading update from Associated British Foods (ABF). The group presented a mixed picture but full year guidance was left unchanged.
The company owns the Primark discount chain as well as well-known brands such as Twinings and Kingsmill. Overall revenue was up 3% on a constant currency basis but all focus was on the sharp contrast between a 17% drop in revenue at the sugar business while value clothing chain Primark continued to grow, opening seven new stores in the period. Though the market noticed that the rate of sales growth at Primark slowed compared to the first half, ABF expects a big improvement in profit in the second half thanks to better buying and the weaker US dollar.
The 4% drop in ABF’s shares in early trading this morning is indicative of the market’s sensitivity to any hint of disappointment when it comes to retail sales. Valuing such a diverse business is not easy but relative to other clothing chains, the shares do not appear cheap.
Nonetheless, the jewel in the crown of ABF’s assets is still growing, both in the UK and internationally, as it is set to open its ninth store across the Pond with a location in Brooklyn and thus there is a strong potential for further growth. The weak outlook for sales and profits at the sugar business is a cause for concern but the longer term growth prospects remain sound and there is increasing global demand for food so we maintain our ‘hold’ recommendation for the stock.
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