More on Associated British Foods
Associated British Foods: H1 results
Associated British Foods’ (ABF) biggest problem in the half year was lower sugar prices in the EU as competition in anticipation of regulatory changes knocked £25m (a third!) off the profits of ABF’s primary foods business (21% of operating profit). The fact that margins have shrunk so fast before the reforms have taken effect shows just how devastating the changes are.
ABF’s largest business, grocery (a division that includes Twinings and Ryvita, it generates 34% of operating profit) had reasonable revenue growth (up 5%) that was offset by lower margins to leave operating profit almost unchanged.
The remaining two major businesses ingredients (13% of operating profit) and Primark (28% of operating profit) were both boosted by acquisitions, although Primark also produced good like-for-like growth of 6%.
These better results were insufficient to offset the sharp decline at primary foods and total operating profit was down slightly.
The second half of the year should show more acquisition driven growth. The major acquisition in the ingredients business has yet to contribute a full year’s profits. The Littlewoods stores acquired last year were closed in January. Those that are being retained will be re-opened using the Primark format from May onwards, adding yet another acquisition driven boost to sales.
The primary foods business clearly faces a continuing difficult time as the changes to the EU sugar regime come in between this year and 2009. It currently generates 21% of operating profit so this could set off much of the growth we see coming from elsewhere.
Primark is performing very well, with its down-market pricing making it less vulnerable to current pressure on consumer pricing. We expect this to continue, while the food businesses (apart from sugar) are doing reasonably well compared to their sector.
At 823p ABF is trading on a prospective PE of 15× with a 2% yield. This is not cheap against the sector or against the retail sector (a comparision made necessary by Primark). However Primark is out-perfomring the retail sector and the other businesses are outperfomring the food producers and processes sector.
Random picks: Boots | Dairy Crest | Electrocomponents | Hammerson | London Stock Exchange | Prudential | Shire | Tate & Lyle | St Modwen | DS Smith