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Morningstar | Stylish 1Q Trading Update for ABF With Primark Gaining Share in Tough U.K. Market; Shares Cheap

In Associated British Foods' first-quarter trading update for the 16 weeks to Jan. 5, revenue from continuing operations was up 2% in constant currency (1% at actual rates). Guidance for flat adjusted operating profit and adjusted earnings per share for the next year is unchanged. We maintain our no-moat rating and GBX 2,660 fair value estimate.

Primark's outperformance continues with sales up 4% (at both constant and actual exchange rates) and profit well ahead, the latter due to currency gains. Retail selling space increased by 0.3 million square feet; the company now anticipates opening 0.9 million square feet in this financial year versus more than 1 million previously expected, the main reason being delays in the opening of a shopping mall in New Jersey, where a Primark store is set to open during the next financial year. Regionally, sales were strong in the eurozone (up 5% at constant currency) with robust performance in France, Belgium, and Italy compensating for soft trading in Germany. In the U.K., Primark continues to gain significant share with sales up 1% in a declining market.

We consider the shares undervalued, trading roughly at a 15% discount to our fair value estimate at the time of writing. Our thesis on ABF is intact, with Primark being the only pure brick-and-mortar clothing retailer that is still growing. Primark continues to dominate the U.K. clothing market and carefully expand in the U.S. and continental Europe. We think its strong value proposition and growth potential will continue to drive strong sales growth numbers and best-in-class sales densities, which in turn enable the company to be the indisputable price leader in the market. 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.

In sugar, revenue was 12% down (14% at actual currency rates), the result of lower EU sugar prices for contracts closed in the previous fiscal year. That said, there is an uptick in prices going forward, according to management. Production in the U.K. is expected to be lower versus last year's (1.15 million tonnes versus 1.37 million), in contrast to Illovo's sugar production, which is expected to be ahead at 1.75 million tonnes.

In other businesses, growth is healthy and in line with expectations with grocery, agriculture, and ingredients sales up 3%, 5%, and 6% respectively at constant currency.