AB Food’s shares dropped 3% despite the positive results from their discount clothing arm.
Primark defies UK retail gloom but conglomerate didn't do so well
- Its shares are the biggest faller in the top 100, down by just over 3%.
- Primark is expected to increase overall sales for the year by 4% as it embarks on further store expansion.
- We maintain our ‘hold’ recommendation rating for investors willing to accept a medium level of risk, seeking capital growth.
Associated British Food’s pre-close update revealed no major surprises and even then the shares are the biggest faller in the top 100, down by just over 3%. Its discount clothing store Primark, which generates roughly half of sales, is expected to increase overall sales for the year by 4%. This is driven by increased store space across the UK and Europe, however like for like sales are weak, falling 1% and 3% respectively. Its margins for the second half will fail to meet the 11.7% achieved in the first half partly due to rising material costs and this effect is expected to continue into next year since sterling has weakened further against the dollar.
Its sugar business’s issues have been well flagged, with both revenues and operating profits expected to be down on the previous year due to lower EU sugar prices and a poor crop. Going forward it is expected EU sugar stocks will remain low going into 2020 and therefore ABF forecast a bounce in spot prices. Meanwhile its grocery business continues to perform relatively well.
Overall this update does not provide too much that is new to investors and it is no surprise management have maintained their previous guidance for the full year. However, the free cash flow should rise this year after reduced capital expenditures in food businesses and Primark. The net cash position is expected to rise to £900m from last year’s £614m.
Our view on AB Foods - Hold
Even the state of the UK and European high street is affecting those at the discount end of the market, and being a conglomerate isn’t helping too much when other key businesses aren’t doing too well either. We continue with our ‘hold’ rating for investors willing to accept a medium level of risk, seeking capital growth.
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