Are AB Foods’ shares a buy ahead of results?

As Associated British Foods unveils half-year results on Tuesday next week, what will investors be looking for?

The owner of Primark said at its pre-close trading statement in February that it expects sales and adjusted operating profits to be substantially ahead of the same period last year. The food producer said it anticipates that Primark sales will be “well over 60% ahead of last year” at constant currency rates.

Comparative figures will be favourable as many of the stores were closed during the first-half of last year. Raw material and supply chain costs hikes were also mitigated by a favourable dollar exchange rate and cost cuts.

Operating profit margins were around 11% in the half-year, but it’s expected that this will dip in the second-half due to inflationary pressures.

The company says the supply chain issues it had earlier in the year have lessened and that the roll-out of the new Oracle supply chain system is on track.

Primark’s expansion plans

AB Foods has been busy adding modest increases to its Primark retail floor space. Since the year-end, the company has increased its retail selling space by 500,000 square feet to 17 million square feet. Four new stores were also opened in Sicily, Girona and Cadiz in Spain, while larger premises have been opened in Gloucester.

It aims to increase its store estate to 530 stores in the next five years, focusing on the US, Italy, France and Iberia. Primark currently has no online retail operation. Its new website, set to launch later this year, will only showcase its products and show product availability in store, rather than enable customers to buy online.

Cost of living crisis bites

Tesco’s recent full-year results demonstrate that few businesses can escape the recent inflation hikes, especially in the retail space. The grocery giant told investors that figures for this year will be lower due to rising input costs.

However, being a discount retailer should stand the Primark business in good stead. Encouragingly, management says that it has had a good response so far to its summer range and its luggage products.

Meanwhile, the food division makes products, such as sugar, which are consumer staples rather than discretionary items. The sugar price worldwide remains high and revenues from the sugar business are expected to be 20% higher than the same period last year.

The agriculture division has also managed to pass on cost increases and enjoyed higher pricing, however profit margins are due to dip in the second-half due to the phasing of price hikes.

Nevertheless, there is unlikely to be any getting away from the fact that results will be affected by higher freight, wage and energy costs. Investors will want to see how successful AB Foods is in passing on these higher input costs to consumers.

Analysts at both broker Jefferies and AJ Bell point to Primark's "resilience".

“Primark has proved to be resilient as ever, with higher input costs being offset by lower store operating costs and favourable exchange rates," said Russ Mould, investment director at broker AJ Bell in February.

“Clever product innovation such as having limited edition Greggs-branded clothes, hats and footwear has helped to keep people coming to its stores. You only need to look at a Primark queue in a typical store to know that demand remains strong... All eyes will be on Primark’s new website which launches by the end of March."

AB Food shares look undervalued

Shares in Associated British Foods have had a rough ride in recent years, falling 28% in the past 12 months to 1,653p. Indeed, the shares have halved since reaching a five-year high of 3,332p in May 2017.

Considering the progress the company is making post the Covid-19 lockdowns, at these levels the shares look undervalued and worth buying.

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