Associated British Foods: Strong Top Line Drives Fiscal 2023 Profit Guidance Update

No-moat Associated British Foods ABF published a nine-month trading update with group revenue up by 17% year to date and 16% in the third quarter in constant currency. Management also updated guidance for fiscal 2023 adjusted operating profit and EPS, which are now expected to be slightly ahead of the prior year, compared with “broadly in line” previously. We believe this increase in absolute profitability will be mostly driven by the top line as the margin is still expected to be materially below the prior year given the strategic decision to moderate price increases at Primark. We don’t expect this update to be too material to our valuation (which calls for adjusted operating profit in line with the prior year and EPS slightly ahead), and we reconfirm our fair value estimate of GBX 2,250.

Primark’s sales grew by 7% like for like in the third quarter, which marks a slight deceleration compared with the 10% reported for the first half. The pace of new store openings also slowed in the quarter (Primark opened 13 stores in the first half and only four stores in the third quarter). Our forecast calls for full-year LFL sales growth of 6% and a total of 23 store openings in fiscal 2023. We are slightly conservative in our like-for-like growth forecast, but expect our somewhat optimistic store number forecast to compensate for it in terms of total revenue growth.

The food division posted strong double-digit growth in the quarter, benefitting from the pricing actions taken earlier in the year to offset input cost increases. The sugar division stood out in the trading update given 51% constant-currency revenue growth in the third quarter, driven by strong trading in key African countries according to management, as well as high European and world sugar prices.