viewAssociated British Foods PLC

Primark owner AB Foods warns of currency hit to profits but maintains guidance

AB Foods expects a strong performance in Primark, grocery, agriculture and ingredients businesses to offset a slump in the sugar division

Primark continued to drive growth

Primark owner Associated British Foods plc (LON:ABF) has warned it would take a £20mln hit to full-year profits related to foreign exchange headwinds and that operating cash inflow would be lower.

In a trading update for the year to September 15, the food and retail group said a strengthening of the pound had a negative impact on results since two-thirds of its operating profit is earned outside the UK.

Operating cash inflow will decline, reflecting higher working capital in the sugar division and an increase in capital expenditure for the expansion of Primark.

The net cash position is expected to be slightly lower than last year due to a decline in operating cash inflow and the £282mln acquisition of Italian balsamic vinegar brand Acetum last October.

Full year outlook unchanged

Still, AB Foods left its guidance for the year unchanged with an improvement expected in adjusted operating profit and adjusted earnings per share.

The company anticipates strong profit from its Primark, grocery, agriculture and ingredients businesses to offset a slump in the sugar arm, which has been hit by lower prices in the European Union.

The EU’s removal of sales quotas and constraints on exports of sugar led to higher production, which dampened prices and resulted in much lower revenue and adjusted operating profit in the sugar division.

Primark sales expected to rise

The group’s star performer, Primark, continues to drive growth with sales expected to be up 5.5% at constant currency boosted by the opening of new stores, although like-for-like sales are forecast to drop 2%.

In the UK, where the retail market has been hurt by weaker consumer confidence and online competition, Primark sales are predicted to increase 6% and like-for-like sales are expected to grow 1.5% as cash-strapped shoppers were attracted by the low-priced items the retailer sells.

READ: Is it time for AB Foods to either sp in-off Primark or sell its sugar division?

In May, the company reduced its selling space at US stores in Freehold and Danbury. AB Foods said trading at these stores has been “encouraging”.

Primark’s operating margin will rise to 11% from 10.4% last year, buoyed by a weaker US dollar in the second half and lower-than-expected markdowns following a successful sell-through of summer ranges.

However, the company cautioned that sales next year will be sensitive to sterling exchange rate volatility, which is like to arise during Brexit negotiations.

It plans to add more than 1 million sq ft of additional selling space for Primark in the next financial year.

Strong performances in grocery and agriculture 

In the grocery division, revenues and adjusted operating profit for the year are expected to be higher than last year, driven by growth in Twinings Ovaltine, improved margin at George Weston Foods and the first year of contribution from Acetum.

Operating profit and revenues in the agriculture business are also expected to rise on the back of higher commodity prices, a larger sugar beet crop and a successful first full year operation from its anaerobic digestion plant.

Quick facts: Associated British Foods PLC

Price: 2599 GBX

Market: LSE
Market Cap: £20.58 billion

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