AB Foods outlook sweetens despite Primark margin squeeze

Profits surged at Associated British Foods in the first half of the year as the sugar business turned a corner and Primark opened 16 new clothes stores across eight countries, lifting management's hopes for the full year.

However, Primark, which contributes roughly half the earnings and three quarters of the value of the group, saw some margin squeeze from the strength of the dollar on its input costs and this is expected to worsen in the second half.

So while further operating profit is expected in the second half it will not be at the same rate as in the first, partly as currency hedges are at a less advantageous exchange rate and partly due to timing effects in some businesses.

Even so, the board's outlook for the full year result has improved in recent months and "good growth" is expected in adjusted operating profit and adjusted earnings per share.

For the 24 weeks to 4 March, the FTSE 100 conglomerate generated revenue to £7.3bn, an increase of 7% compared to the year before, while underlying profit before tax increased 35% to £652m - with statutory PBT mushrooming 92% thanks to the sale of its US herbs and spices and south China cane sugar operations for a profit of £255m.

Adjusted earnings per share grew 30% to 59.7p and an interim dividend of 11.35p per share was declared, a rise of 10% on last year's.

Chief executive George Weston hailed the substantial increase in selling space at Primark, with 16 new stores adding 0.8m sq ft. of selling space across eight countries in 24 weeks, helping to boost revenue 12% on a comparable basis with last year.

Primark's operating profits of £323m were up 3% at actual currency rates but down 2% underlying.

Furthermore, he pointed to a more acceptable rate of return for AB Sugar, reaching a "turning point" as higher sugar prices met further significant savings generated by performance improvements, while group profit growth also benefited from substantial increases from the grocery and ingredients businesses.

The shares rose 3% in early trading on Wednesday, but is still down almost 19% on its 52-week high a year ago.

Analyst Nicholas Hyett at Hargreaves Lansdown focused on the effect of the dollar, not just on Primark margins.

"Fortunately, with more than two thirds of revenues generated overseas, weak sterling has acted as a boost to performance at much of the rest of the group," he said, particularly pointing to a recovery in the sugar price that combined with the currency tailwind added more than £100m to profits.

"Longer term, the group is still reliant on the roll-out of Primark stores in the US. Progress here is slow, but early signs are promising, with the recently opened Staten Island store said to be performing very well. If Primark can build on its initial success, the British may soon be coming for American shoppers from Main Street to 5th Avenue.”