Associated British Foods Plc raised its outlook and interim dividend as shoppers head to budget fashion chain Primark and inflationary pressures in the food division ease.
The British conglomerate, whose business ranges from grocery and agriculture to clothing, expects “significant growth in both profitability and cash generation” this fiscal year. Its previous guidance in January forecast only “meaningful progress.”
AB Foods lifted its interim dividend by 46% to reflect the growth in earnings amid the “restoration of some normality in our markets and in our supply chains,” according to a statement Tuesday.
The company’s stock rose more than 7% in early trading in London. The shares had already gained more than 21% before Tuesday’s surge.
The better-than-expected first half was driven by a steady performance at Primark, where higher average selling prices and new store openings helped drive a recovery in profitability. The chain’s profit margin recovered to 11.3%, ahead of target, with further moderate improvement forecast in the second half.
“Volumes are OK at Primark but the trading environment in all our markets is recession affected,” said George Weston, chief executive officer of AB Foods, on a call with Bloomberg.
“We’re performing well against the sector where sales are down,” he said, adding that as salaries rise higher than inflation sales volumes could start to increase further. “So perhaps in the second half we’ll see better like-for-like sales.”
AB Foods said volumes had started to recover in its food unit after a prolonged period of inflation which forced some cash-strapped shoppers to rein in their spending.
“Consumer spending on food is still cautious,” said Weston. “We’re still seeing elevated levels in own-label sales. The situation varies by market too. Australia is very soft, the UK has recovered somewhat but it’s early days.”
The conglomerate also reported greater profit in its sugar division following a strong recovery in the UK beet crop and reduced losses in its biofuel business.
Investors in AB Foods will be looking for more details on how management expects to deliver share gains and margin expansion in a soft consumer environment, said James Grzinic, an analyst at Jefferies, in a note to clients.
