23rd Apr 2024 10:07
(Alliance News) - Primark owner, Associated British Foods PLC, impressed the City as improving margins helped drive a strong first-half.
Shares in AB Foods, the London-based food processing and retailing outfit, jumped 9.4% to 2,740.27 pence in London on Tuesday.
"The group has delivered a strong first half performance and is on track to deliver significant growth in both profitability and cash generation ahead of expectations at the start of this financial year," AB Foods said in a statement.
In the 24 weeks to March 2, AB Foods reported pretax profit of GBP881 million, up 37% from GBP644 million the year prior. Basic and diluted earnings per share were 87.4p, up 30% from 67.0p.
Revenue edged up 2.3% to GBP9.73 billion from GBP9.56 billion a year before.
In response, AB Foods hiked its interim dividend by a substantial 46% to 20.7p from 14.2p.
Primark sales increased by 7.5% on a constant currency basis to GBP4.50 billion from GBP4.23 billion, AB Foods said.
Operating profit in the division jumped 46% to GBP508 million from GBP351 million. This reflected an improved profit margin of 11.3%, up from 8.3%.
There also was a strong profitability improvement in the Sugar division, driven by better Vivergo performance and good profit growth in Ingredients, driven by continued strong performance in AB Mauri.
As well, AB Foods reported higher profitability in Agriculture due to lower input costs.
Chief Executive George Weston called it "a very strong set of financial results", which benefited from the "restoration of some normality in our markets and in our supply chains".
"Improvements to the group's operational performance, driven by the investments and strong execution over the last few years, are now becoming visible. Group profit margins are recovering accordingly to more normal levels," he noted.
Barclays said this was a "strong set of results with broad based improvement across its portfolio."
The standout figures were a 39% increase in adjusted operating profit and a 46% increase in adjusted EPS, it felt.
As a result, Barclays has raised its earnings estimates by 7% in 2024 and 4% in 2025 which drives an increase in its share price target to 2,700p from 2,400p.
Barclays said the focus will likely be on the "drivers of another Primark margin beat but we were equally impressed by the strength of Grocery, Ingredients and Sugar."
Barclays noted Primark's operating profit margin of 11.3% was 60 basis points ahead of consensus of 10.7% mainly driven by a stronger gross margin performance which is helping the profitability of most countries.
"The improving gross margin picture has been a consistent message we have been hearing for more than six months," it pointed out.
Pricing is a big component of the gross margin improvement as is improving mix and a lower level of mark downs, Barclays noted.
However, it said the biggest driver is a reduction in material costs, such as cotton, as well as lower freight costs.
The cashflow performance was also very good with working capital and tax better than expected, it noted.
The only obvious 'bear' point was the continuing negative volume performance from Primark which was explained by weak clothing markets in both the UK and parts of Continental Europe, Barclays added.
"Although Primark is taking market share, it is clearly not immune to underlying market conditions," Barclays commented.
"Some of the weakness is clearly explained by adverse weather but we suspect that there is also an element of consumer caution."
Barclays explained this is important because as pricing rolls over fully in the second half, Primark will need to see an improving volume picture to deliver like-for-like growth.
"Undemanding comparatives will help as will mix but there is still work to do to deliver volume growth."
"That aside, overall the results show a clear normalisation of trends after the Covid years, supply chain challenges and inflation headwinds and the bounce back in profitability is a testament to the resilience of [AB Food's] business model which some had questioned," Barclays added.
Barclays has an 'equal weight' rating on AB Foods.
By Jeremy Cutler, Alliance News reporter
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