Associated British Foods (ABF) continues to benefit from the revival of raw sugar prices whilst a spike in high street activity around a sunny Easter kept retail challenges at bay in the third quarter. Despite Primark performing “a lot better than H1,” ABF still only sees the outlook for the remainder of the year as only marginally improved.
No Primark markdown yet
Looking at the Thursday’s share price rise of as much as 180p, investors are instead focusing on impressive 13% growth in group revenues at constant currency, and also at Primark this year, though at the latter it was partly flattered by a comparable effect against last year when Easter was earlier and the weather was worse.
Ambiguity about the retail business' underlying performance is also visible in its weaker margin. That fell 170 basis points to 10%, pressured by dollar-denominated input costs. High street clothing rivals have seen similar or worse impact sterling impact, but few are scaling up space internationally at Primark’s rate. The group’s decision to push ahead with international space expansion—1.5 million square feet planned in total for the current financial year—looks like a bet that the pound will stabilise. Increased exposure to the euro and the dollar may not be taken lightly if the pound wilts again.
ABS still energised
For now, Thursday’s investor reaction is all about sugar. Prices have in fact declined off the highs of last year, but the group notes AB Sugar already has commitments for most remaining current-year contracts in the EU. We also note US and London futures have stabilised in recent weeks. Furthermore, the removal of tens of millions of pounds in sugar manufacturing costs over the last few years can offset a moderate price decline in 2017/18. As for next year’s UK production, which will be the first outside of the EU’s quota, it is “well established” from a planted area that is a third higher. Production also points higher in Africa and China, though the latter recently announced new duties.
Still, the scene looks set for a continuation next financial year of the current transfer of underlying growth from Primark to ABS. This is staving off investor concerns about the reversal of Primark growth as its low-cost model is pressured, exposure to US dollar input costs and potential supply chain disruption in one of the largest food production operations in Europe. Associated British Foods (LON:ABF) stock is outperforming rivals on both the high street, where shares are in the red for the year, and in food production, like Tate (LON:TATE), from which ABF’s stock recently diverged. The group needs its sugar high to last.
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