Tuesday newspaper share tips: Concerns about Primark's growth

The Telegraph’s Questor said on Tuesday it is concerned about Primark’s growth after its latest trading update.

The board of Associated British Foods, Primark’s parent company, said on Monday it expected some progress in adjusted operating profit for the group in the current period, though adjusted earnings per share were expected to be slightly lower.

It said the underlying trading outlook for the full year remained unchanged, with the weakening of sterling in recent weeks easing the effect of currency translation on the year's results from £25m to £10m.

ABF's retail division - which consisted entirely of budget high street fashion chain Primark - was the shining star for the board, with sales expected to be 7.5% at constant currency and 4% at actual exchange rate, as a result of the brand's continued expansion.

"Operating profit margin in the period had been better than expected, with much of the impact of the stronger dollar being mitigated by a good buying performance and a lower level of markdowns arising from a well-managed stock position," the board said.

Primark's foray into the US was continuing apace as well, with the second store in the country opening in November and the company planning a further six stores in the current calendar year.

"Early trading at our two new stores in the US has been encouraging with the range and concept being well-received," the board said.

Despite the positive signs, Questor said it wasn’t ready to turn positive on the company yet.

“When we looked at the stock a month ago, following ABF’s last trading update, we were concerned about slowing sales at Primark, the business that has been the main engine of the company’s share price growth in recent years,” the column noted.

It said that the 4% rise in sales is still short of the 13% is posted at the same point in 2015.

Questor was also concerned about the sugar business, saying it had stabilised but “is still too early to tell if it is a sustainable recovery”.

For those reasons, it rated the shares at ‘sell’.

Meanwhile, The Times’ Tempus sifted through HSBC’s full year results, rating the shares at ‘hold’.

The FTSE 100 bank missed full year profit consensus forecasts by 8%, as it missed fourth quarter targets by a long way.

It posted a reported profit before tax of $18.9bn (£13.3bn) for the year to 31 December 2015, up a mere 1.069% from $18.7bn in 2014.

However, adjusted profit before tax dropped from $22.0bn to $20.4bn; below the market consensus range of $22.0bn-$22.7bn.

For the fourth quarter, adjusted profit before tax came in a $3.4bn, below consensus forecasts of $5.1bn.

Adjusted operating expenses for the full year rose 5% to $36.2bn due to wage inflation, business growth and investment in regulatory programmes and compliance.

The bank said expenses in the second half were broadly in line with the first half after excluding the UK bank levy, which reflected strong cost management and the initial effect of its cost saving programmes.

However it highlighted that the current economic environment is uncertain.

“But our diversified banking model, low earnings volatility and strong capital generation give us strength and resilience that will stand us in good stead,” HSBC said.

Tempus said the results gave shareholders few reasons to cheer, except for the 51 cent full year dividend with the bank not showing any signs of changing its policy there.

“That is not something to be sniffed at in the present climate, where FTSE 100 income stocks are becoming increasingly rare,” the column noted.

Delving into its lending book, HSBC’s core performance and the latest Bank of England stress test figure, Tempus said it is still one of the best businesses on the street.

“We now know that even with a sharp recession in Britain, a 65 per cent sell-off in Hong Kong equities and Chinese growth slowing to less than 2%, HSBC would still be in excess of the minimum capital levels required by regulators.”

With the company still paying dividends and one of the better banks in the world, Tempus advised to ‘hold’ the shares for now, but said the time to buy might not be too far away.