Associated British Foods (LSE:ABF) was the worst-performing FTSE 100 stock today (10 September) after the group released a trading update for the second six months of its current financial year that’s due to end on 13 September (H2 25).
Although the group’s chief executive was “pleased” with the performance, he said the market was “challenging” and “characterised by consumer caution, global uncertainty and inflation”.
The group has two distinct business units. One includes Primark, the low-cost fashion retailer and the other comprises its grocery, ingredients and sugar businesses.
Primark’s UK trading was described as “improved”, and “strong sales growth” was reported for the US. By contrast, Europe was said to be “softer”.
The group’s food division performed in line with expectations.
Reading this, it’s hard to understand why the share price tanked. But a closer look reveals a number of issues that appear to have spooked investors.
A bitter taste
Of most concern, is its sugar business, which includes Silver Spoon.
During the second half of the year, sales and profitability declined significantly in the UK and Spain due to lower European sugar prices and the higher cost of beet. The upshot is that full-year adjusted operating profit is likely to be close to breakeven (removing the impact of a major plant closure) and sales are expected to be 10% lower.
A restructuring has resulted in a £200m impairment charge including £50m of cash costs that will be spread over 2025 and 2026.
And the outcome is a little gloomy. The group has secured lower beet prices via long-term contracts but sugar prices remain lower than expected.
Cheap but not so cheerful
As for Primark, like-for-like sales in the almost-at-an-end H2 25 are expected to be 2% lower compared to the same period in 2024. Even so, in the UK and Ireland it’s managed to improve its market share from 6.6% to 6.8%.
In 2024, the retailer accounted for 47.2% of group revenue and contributed 55.6% to adjusted operating profit.
When it comes to embracing the internet, Primark has lagged behind most of its rivals. However, its ‘Click and Collect’ service is now operating in all of its 187 British stores.
The group’s also planning to expand into the Middle East with a franchise partner. Its first store is due to open in Kuwait in October.
Final thoughts
It’s been a turbulent 12 months for the group’s share price. Before today’s tumble, the stock was changing hands for marginally more than in September 2024. However, the stock’s now 20% below its 52-week high.
One advantage of this is that new investors could enjoy a yield of 4.6%. Of course, there are no guarantees when it comes to dividends.
Despite the reaction to the trading update, Shore Capital remains positive. It said: “When the stars align across ABF’s divisions, it is a most compelling entity from earnings, cash generation and returns perspectives.”
Unfortunately, it’s unclear to me when the stars will move into more favourable positions. On this basis, I would prefer to wait until the group’s full-year results are announced on 4 November before revisiting the investment case.
