Morningstar | In-Line 2019 Interim Results for Associated British Foods; Shares Fairly Valued
In Associated British Foods' interim results for the 24 weeks to March 2, both top-line and bottom-line growth across the businesses of the group were in line with our expectations. Management reiterated fiscal 2019 guidance for flat adjusted operating profit and adjusted earnings per share, significantly lower AB Sugar profit, and strong Primark space growth. We maintain our no-moat rating and GBX 2,660 fair value estimate. The shares are now trading in the 3-star territory after a 10% rally during the last month.Primark's outperformance continued with preannounced sales up 4% (at both constant and actual exchange rates), driven by expansion of retail space partially offset by a 1.5% contraction in like-for-like sales. Profit was well ahead versus the same period last year at 11.7% (190 basis points higher), driven by better buying, lower markdowns, and currency gains, with the last expected to reverse in the second half due to a stronger dollar.
In sugar, we think Africa sugar business Illovo's bedrock of profitability (around GBP 100 million) will continue to support the segment, while gradual adjustments to the new reality of lower EU sugar prices will benefit scaled producers with financial flexibility such as AB Sugar. Revenue for the segment is expected to be lower than last year, the result of lower EU sugar prices for contracts closed in the previous fiscal year (affecting mainly the U.K. and Spanish businesses). That said, there is an uptick in prices going forward, according to management, due to lower U.K. crop area. Production in the U.K. is expected to be lower versus last year (1.15 million tonnes versus 1.37 million), in contrast to Illovo's sugar production, which is expected to be ahead at 1.76 million tonnes.
In other businesses, sales were in line with expectations, with grocery, agriculture, and ingredients sales up 3%, 8%, and 5%, respectively, at constant currency.
Associated British Foods is an international food, ingredients and retail group. Co. operates in five segments: Grocery, which manufactures grocery products, including hot beverages, sugar and sweeteners, vegetable oils, bread and baked goods, cereals, ethnic foods, and meat products; Sugar, which grows and processes sugar beet and sugar cane for sale to industrial users; Agriculture, which manufactures animal feeds and provides other products and services for the agriculture sector; Ingredients, which manufactures bakers' yeast, bakery ingredients, enzymes, lipids, yeast extracts and cereal specialities; and Retail, which buys and merchandises value clothing and accessories.
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