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AB Foods sees strong profit growth from its Grocery and Primark divisions

The strengthening of the US dollar during this year has increased the cost of goods for the first half of the current fiscal year at Primark

Associated British Foods PLC -
This year marks the 50th anniversary of the opening of the first Primark shop

Associated British Foods PLC (LON:ABF), the Primark and food businesses owner, has cautioned that the weakness of sterling is hitting margins at Primark.

The diversified holding group said that Primark's margins would decline in the first half of the fiscal year just begun, despite reductions in the cost of goods and overheads, thanks to sterling's travails on the foreign exchange markets.

As for the second half of the current financial year, if exchange rates stay about the same the group expects Primark's margin to be in line with the same period in 2019; the margin for the full year is expected to be slightly down year-on-year.

On the plus side, the sugar division, which soured an otherwise solid set of results in the fiscal year just ended, is set to benefit from recovering sugar prices in the EU.

The Grocery division is expected to see another year of strong profit and margin growth, with the Twinings Ovaltine business, in particular, benefiting from a more efficient tea supply chain.

The 52 weeks to 14 September saw the group's revenue edge up 2% to £15.82bn from £15.57bn the year before.

Reported profit before tax declined to £1.17bn from £1.28bn the previous year. Adjusted profit before tax moved up 2% to £1.41bn.

Primark once again the star

Primark once again delivered the lion's share of AB Foods' profits, with adjusted operating profit of £913mln, up 8% on £843mln the previous year.

The retailer's adjusted operating profit margin improved to 11.7%, up from 11.3% the previous year, with a margin of 11.7% in the second half of the fiscal year exceeding management's expectations.

Sales were up 4% at £7.79bn from £7.48bn the year before although the clothing flogger did experience a 2.0% decline in like-for-like sales.

The Grocery division delivered a 10% year-on-year increase in adjusted operating profit on a constant currency (CC) basis to £380mln.

The Sugar division's adjusted operating profit was down 78% on a CC basis at £26mln, while the Agriculture arm's adjusted operating profit fell 30% on a CC basis to £42mln.

The Ingredients division took a small step back, with adjusted operating profit off 6% from a year earlier on a CC basis to £136mln.

Little Brexit disruption expected

The group said its business model entails cross-border trading between the UK and the rest of the European Union, so it does not expect much disruption when – or if – the UK leaves the union.

Nevertheless, it has completed all practical preparations and has contingency plans in place should there be some disruption at the time of exit.

"The group delivered a resilient performance this year, with strong profit growth from Grocery and Primark which more than offset the profit decline in Sugar,” said George Weston, the chief executive of AB Foods.

“We continued to pursue the opportunities to grow our businesses with a gross investment of over £800mln. Next year the group is well-positioned for further progress, with the continued expansion of Primark, a material improvement in our Sugar profit and strong profit growth in Grocery," he added.

The full-year dividend has been increased to 46.35p from 45.0p.

AB Foods shares were up 3.6% at 2,330p in early deals.

Quick facts: Associated British Foods PLC

Price: 1823.297 GBX

LSE:ABF
Market: LSE
Market Cap: £14.42 billion
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