Associated British Foods shares were sharply higher on Tuesday as investors cheered stronger Primark sales amid the cost of living crisis.
Associated British Foods’ sugar and food business often plays second fiddle to Primark in the eyes of investors, and looking at today’s update, it is easy to see why.
Although AB Foods enjoyed growing sales and operating profit in the grocery and ingredients business, the Primark unit accounted for a large proportion of the group’s 17% increase in operating profit to £1,383m.
AB Foods shares were 6.7% higher at the time of writing and were by far the best performing FTSE 100 shares on Tuesday morning.
Sugar operating profit fell 27% due to crop issues and Agriculture profits fell amid tough market conditions.
Primark’s sales jumped 17% to £9bn on an actual currency basis, accounting for a little under half of the group’s £19.75bn total revenue. The company has taken the decision to pass on only a part of their input cost inflation customers, which has helped customers through the door during the cost of living crisis.
“The key Primark business has benefitted from a changing retail landscape over the past few years, especially with the demise of Debenhams and Topshop,” said Aarin Chiekrie, equity analyst at Hargreaves Lansdown.
“That’s helped sales grow 15% at Primark, up to £9.0bn for the full year, with 27 new store openings and an improved website helping Primark to ring more cash through the tills. Margins here fell slightly as the group chose not to pass the full extent of inflated input costs onto consumers in order to keep its price-sensitive customers happy amidst the current cost-of-living crisis.
“One of ABF’s key strengths is its diversified portfolio of businesses, which includes many well-known food brands such as Kingsmill, Ryvita and Patak’s. This diversification helps to spread out risk, ensuring the company isn’t overly reliant on any one product or division.
“That’s been a benefit in recent times as unhelpful weather in the prior year dented performance at the group’s African sugar business, Illovo. But after strong pricing actions and much-improved production levels, sugar revenue soared nearly 30%. The strong financial performance means there’s plenty of room to return excess cash to shareholders, with a special dividend and new £500m buyback programme on the way.”
