Primark prospers but sugar profits soar 60% for Associated British Foods.
Primark-owner Associated British Foods (LSE: ABF) unveiled inline interim results this morning, as cash-strapped shoppers continued to seek value in its discount fashion stores and profits in the group's sugar business soared on higher prices.
Diversification
Group revenue for the 24 weeks ended 3 March came in at £5.8bn, up 11% on the corresponding period last year. Adjusted operating profit increased by 6% to £412m, earnings per share (eps) swelled 5% to 34.4p, and the company lifted the interim dividend by 8% to 8.5p per share.
One of the great strengths of a conglomerate like ABF is diversification. The benefits of this can be seen in the table below, which breaks down revenue and operating profit by the group's five business divisions:
| | Revenue (£m) | Growth | Operating profit (£m) | Growth |
|---|
| Grocery | 1,813 | +4% | 75 | -31% |
| Retail | 1,615 | +15% | 154 | +2% |
| Sugar | 1,203 | +17% | 172 | +59% |
| Agriculture | 597 | +18% | 16 | -11% |
| Ingredients | 538 | +2% | 18 | -42% |
| Total | 5,766 | +11% | 412* | +6% |
* £435m less £23m central costs
As you can see, revenue increased across the board but operating profits actually fell in three out of the five divisions. Nevertheless, modest growth in retail (Primark) and a stonking performance from sugar produced an overall 6% uplift in group profit.
In the large grocery business, there was a good performance from Twinings Ovaltine, but trading was tough for Allied Bakeries in the UK -- Kingsmill required a high level of promotion – and for George Weston Foods in Australia. Restructuring and brand refreshment costs pulled operating profits down. Challenging conditions took a similar toll on the smaller agriculture and ingredients divisions.
Sugar and skirts
In sugar, high beet yields and sucrose content, strong factory performance and higher sugar prices in most regions fuelled excellent first-half revenue and profit growth.
Meanwhile, Primark continues to go from strength to strength. Like-for-like sales increased by a solid 2% and overall growth came in at 15%, with trading in 10 newly opened stores exceeding management expectations. Operating profit growth was more modest as the company decided not to pass on higher cotton costs to its customers.
With strong momentum in sugar and retail sales, and Primark set to benefit from a big margin boost in the second half due to cotton prices having fallen, ABF's chief executive George Weston said: "We expect substantial growth in both adjusted operating profit and adjusted earnings per share for the group for the full year."
Valuation
Ahead of this morning's results, analysts were forecasting full-year eps of 85.8p, which, after the first half's eps of 34.4p, implies a second-half eps of 51.4p -- a 24% increase on the 41.4p of last year's second half. For the full year, the eps increase would be 16%.
On the face of it, that sounds as if the market may already have factored in Mr Weston's "substantial growth". However, at the current share price of 1,240p -- up 2% on the day -- ABF is on a price-to-earnings ratio of 14.5, which isn't bargain territory but not such a bad price to pay for 16% annual earnings growth.
Is 16% growth sustainable for ABF? Last night, analysts' earnings forecasts for 2013 suggested not, so it will be interesting to see whether they are revised in the light of this morning's results.
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