On the money: Associated British Foods on the up

By Chris Mercer | 17 January 2013

Analysts' superlatives for the 'stunning' performance of Primark do not stretch to the food units of Associated British Foods, but the group as a whole looks healthy in 2013 - and it might also have cash to splurge.

Associated British Foods' (ABF) share price jumped by 7.5% in morning trading today (17 January) after the group's Primark clothes stores saw sales leap by 25% in the first quarter of its fiscal year. Overall group sales for the 16 weeks to 5 January increased by 10% on the same period of the previous year.

Analysts lauded a classy showing from ABF. "ABF have confounded our caution once again," said Investec analysts in a note. "These are exceptional numbers and feel structural rather than one-off in nature."

Much of this is down to Primark, however. The implication was largely that all the grocery, commodities and ingredients businesses have to do now is stay out trouble.

If Primark is removed, ABF's sales look rather more pedestrian. Grocery and ingredients sales were flat, the former largely reliant on Ovaltine Twinings and pushing through on higher bread prices. Sugar did better, with sales up by 12%, but the profits outlook is not great, while agriculture delivered a reasonably robust 3% sales rise.

Sanford Bernstein analysts said ABF's grocery division "remained lacklustre" in the reporting period. At least, though, the analysts noted that 2013 shouldn't carry the same sorts of pitfalls as the firm's previous full-year, when restructuring caused a 23% fall in adjusted operating profits in its grocery business.
ABF itself said that it expects "some recovery" in grocery this year.

Panmure Gordon analysts were more bullish on grocery outlook. In addition to ABF's success at passing on bread costs in both Australia and UK, they added: "Encouragingly, ABF now seems to be making progress with its Australian meats business, with higher volumes and improved cost control. We forecast full-year EBITA rising strongly from GBP187m to GBP243m, helped by lower restructuring charges." 

Amid a turbulent period for the UK bread market, brought on by volatile input costs and what many analysts see as a structural oversupply, there has been speculation that ABF's Allied Bakeries might swoop for Premier Foods' Hovis business.

This will clearly be something to watch, particularly as analysts are raising ABF's earnings guidance. Panmure analysts said: "Cash generation also looks to be stronger than expected." Most extra cash, though, could be used to cut debt.

In sugar, Bernstein analysts said they expect ABF's performance "to slow considerably in 2013". They said management confirmed this by announcing a 12% rise in first-quarter sugar sales but guiding to lower profits for the year as a whole. The analysts expect an 11% sales rise in the first-half, albeit with lower profits.

Panmure analsyst said that, while there were no shocks in ABF's sugar trading statement, they have trimmed their full-year EBITDA forecast for the unit. "As previously stated, UK profits will be lower than the exceptional levels achieved last year due to lower production (1.13mt vs 1.32mt), higher beet costs and a weaker Euro," the analysts said.

A lower sugar crop will likely constrain feed sales in ABF's agriculture division. It is, though, ABF's ingredients business that looks under the most immediate pressure at the top- and bottom-line, and Bernstein analysts sees little respite on this score in 2013.

Overall, ABF looks in decent financial health going into the remainder of its fiscal year.

Sectors: Bakery, Financials, Retail

Companies: Associated British Foods

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