The Associated British Foods (LSE:ABF) share price fell on Tuesday morning after the company said that inflation was impacting its businesses. The share price fell in early trading before recovering slightly. However, it wasn’t all bad news as the Primark owner reported a near doubling in first-half profit.
Associated British Foods is a British multinational food processing and retailing company headquartered in London. The company is perhaps best known for its high-street clothing store, Primark. However, it ingredients division is the world’s second-largest producer of both sugar and baker’s yeast.
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What’s in Tuesday’s update?
The trading update included positive performance data as well as a warning on inflationary challenges. The agribusiness-to-clothing group reported soaring first-half profits. The firm, which owns major clothing, sugar, grocery, ingredients and agricultural businesses, made adjusted operating profit of £706m for the 24 weeks to March 5, up from £369m in the previous period. Group revenue for the six months rose 25% to £7.88bn.
There was more good news for shareholders as the interim dividend was more than doubled to 13.8p a share from 6.2p.
ABF said the results were driven by improved trading in its clothing business. All Primark stores had remained open and trading throughout the period, except for short spells in Austria and The Netherlands. Sales at Primark increased 59% to £3.54bn.
ABF’s other businesses didn’t see the same level of growth. Sales in the group’s food ops rose 6% to £4.34bn.
However, the London-headquartered firm also raised issues around inflation across its businesses. It noted that inflationary pressures were such that it was unable to offset them all with cost savings. As a result, Primark will implement selective price increases across some of its autumn/winter range.
The food businesses also noted the impact of inflation. ABF said it was balancing this impact with cost-saving initiatives and price increases. It added that the war in Ukraine had led to higher commodity and energy prices. As a result, margins would be reduced across the food businesses.
Should I buy?
The stock is down nearly 30% over the past year. And that belies the strong performance in the 24 weeks to March 5. The firm appears to be on track to register its best results in three years and post annual figures in line with pre-pandemic performance.
And while it has registered concerns about the impact of inflation, I’d suggest that low-cost clothing brand Primark is well placed to benefit from the cost of living crisis. I appreciate that margins will be cut, but I do see this part of the business attracting shoppers as more expensive retailers lose out. We may already be seeing this in the stellar H1 performance data. I’m more concerned about the impact of inflation on the food businesses. Although it’s worth noting that rivals will be feeling the same pressures.
I actually already own shares in ABF. But after today’s share price drop, the increase in dividend and promising H1, I’m looking to buy more.
