Shares in Primark owner and FTSE 100 member Associated British Foods (LSE: ABF) were trading lower as markets opened this morning following the release of a pre-close trading update for the first six months of its 2018/19 financial year. That’s despite the £18bn-cap stating it expected to report sales growth in all of its businesses (with the exception of its Sugar division) and that earnings per share would be “broadly in line” with that achieved at the same time last year. Let’s take a closer look at those numbers.
Decent trading
As previously flagged by the company, sales at AB Sugar are likely to be lower over the current six months than in 2017/18 as a result of lower EU contracted sugar prices affecting business in the UK and Spain. While operating profit for the full 12 months is still in line with expectations, this part of the company will register “a marginal loss” at the interim stage.
Elsewhere, things were more positive. Over at its Grocery division (which includes brands such as Twinings Ovaltine, Jordans and Ryvita), revenue and operating profit “are expected to be ahead of last year on an underlying basis, with a further improvement in margin.” Revenue at its Agriculture and Ingredients arms are also expected to be ahead.
Trading at Primark appears to have recovered well with the company reporting it has “substantially increased” it market share in the UK. That’s a pretty good result considering the ongoing gloom on the high street and the fact the company had warned of “challenging” sales in the run up to Christmas.
Despite a 2% decline in like for like sales overall, revenue is predicted to be 4% higher than H1 2017/18 thanks to new stores being opened. Sales in the Eurozone are expected to be 5% ahead of last year and the company “continues to perform strongly” in the US. Encouragingly, profits are now forecast to be “well ahead” of those achieved last year.
Good value?
Changing hands for 17 times earnings before this morning (and yielding 2%), shares in AB Foods are certainly cheaper than they have been in the past, but they’re still far more expensive than some of its FTSE 100 high street peers.
Although appealing to a less price-conscious consumer, Marks & Spencer‘s stock trades on a little less than 12 times earnings and yields 6.5%. Next trades on a similar valuation, yields 3.5% and — based on operating margins and returns on capital employed over the years — appears a far better business than the other two.
That said, there are reasons to remain bullish. Its balance sheet continues to look strong with a net cash position of around £300m at the end of the six months — almost 150% more than at the same point in 2018.
The fact that the company has not changed its guidance on full year earnings either may help to calm investors nerves over the impact of Brexit. The new spring/summer range at Primark looks to have been well-received and another 900,000 sq ft of selling space will be added in the UK and Europe in 2019.
No doubt the company will be back in favour with investors in time. As mentioned here, however, I think there’s a far more attractive recovery play in the top tier at the moment.
