All the pieces are in place for a sound year ahead for Associated British Foods PLC (LSE:ABF), going by City reactions to the Primark parent company’s full-year financials.
In today’s earnings call, the group launched a fresh share buyback and rewarded shareholders with a special dividend after reporting double-digit growth in revenue and profit.
Shore Capital Markets said that AB Foods’ “financial constitution remains very strong indeed, a virtue to us in a normalised interest rate environment”.
The 12.7% special dividend “is a most pleasant surprise, which we warmly welcome”, said analysts, who noted that all-in dividends have increased a “whalloping 37%”.
Alongside improving margin conditions at Primark, AB Foods is well placed to capitalise on elevated pricing power in its ingredients division, although agriculture remains under pressure “after a period of considerable turbulence”.
Sugar has emerged as an underappreciated division for AB Foods.
UK-based crop yields were negatively impacted by disease-influenced conditions this year, but the wider global sugar market is going AB Foods’ way, according to analysts, who noted a “much-improved market backdrop, albeit the vagaries of harvest and what the climate serves up remains to be seen”.
They added: “For now though, the expectation of a substantial improvement in 2024 profit production persists.”
Looking at the wider picture, AB Foods faced significant externally derived headwinds in recent years, most clearly the almost existential threat of the pandemic when all of its Primark stores were closed with massive operating costs and working capital pressures.
However, the cost of goods sold (COGS) environment is set to improve for Primark, while higher interest rates that have forced pure plays “to focus upon solvency over market share growth, has dramatically improved the comparative competitiveness of Primark”.
“We see the stock as still undervalued and reiterate our BUY stance,” stated ShoreCap.