Primark-Owner ABF Shares Surge as It Ups Guidance Due to Weak Pound

Analysts say that Primark's sales could double with further expansion into the U.S.
By Lisa Botter ,

Associated British Foods (ASBFY) shares surged in early morning trading and were up 7.7% after the Primark clothing store owner said its bottom line would be boosted by the weak pound.

The pound has fallen to 31-year low following the U.K.'s Brexit referendum, which resulted in a vote to leave the European Union. The pound was recently trading at $1.246.

In a trading update released today ABF said it does not expect a decline in adjusted earnings per share for the group for the full year after all. This is due, the company said, to a weaker pound in the third quarter.

The company also operates sugar, agriculture and ingredients divisions.

ABF said that the EU referendum has created uncertainty in the business environment, but the company undertakes relatively little cross-border trading between U.K. and the rest of the EU.

"Following the result of the EU referendum, sterling has weakened further and at these rates we expect a bigger translation benefit in the final quarter with no material transactional effect," the company said.

In the next financial year, the weak pound will have hit profit margins at Primark, have a favorable effect on sugar margins and be of benefit to group profit earned outside the U.K., which last year accounted for 50% of total profits.

Group revenue for the 40 weeks ended June 18  was 3% more than the same period last year.

Sales at Primark were up 7% compared with last year in the 40-week period. This was driven by an increase in retail space. Same-store sales in the last 16 weeks, however, were adversely affected by unpredictable weather, especially a cold April.

Jefferies said the year-to-date sales were a little shy of the analysts' expectations but despite headwinds from start-up losses from the U.S. and a mid-seasoning sharpening of price points, Primark is defying gravity on margins.

Primark opened its first U.S. store in Boston, Mass. last year and plans to open another six stores in the northeast this year.

The group's grocery business is also doing well, with sales in Allied Bakeries "well ahead" of last year and Twinings Ovaltine making advances in ts biggest markets of the U.K., U.S. and Thailand.

Revenue for the company's sugar business was higher than last year. ABF said that it would expect a boost to profit next year as world sugar prices increase. "All of our sugar businesses have delivered substantial cost reductions again this year through a combination of continuous improvement business transformation, capital expenditure and procurement activities," the company said.

The sugar division completed a buyout of minority shareholders in Illovo Sugar in May for £235 million ($305.2 million). Operating profit is expected to be unchanged by this.

The agricultural division continues to decline, driven by low commodity prices. And the ingredients business' profit continue to be "substantially ahead."

Analysts at Liberum said: "Despites short-term concerns, ABF's long-term fundamentals appear robust and we retain our conviction that Primark and sugar will power mid-term profit growth. We estimate Primark can double sales and profits over the next five years driven by continued expansion on the continent and in the U.S."

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