Associated British Foods saw first-half adjusted operating profit fall by 1% to £648 million, which was a slight miss on the previous guidance of £652 million. Revenue for the period increased by 2% to £7.422 billion.

It was the same old story, with growth from Primark and the grocery business, while the sugar division underperformed. The group’s full-year outlook remains unchanged, and the interim dividend was lifted by 3%, so overall it was a respectable set of results.

In keeping with tradition, Primark’s profit rose by 4%, despite lower margins. The clothing division increased its UK market share, and it expects margins to improve on account of the rise in the pound against the US dollar. We can expect more positive things from Primark, as the fashion house has put expansion plans in place.

The grocery and ingredients division is ticking along nicely. The group acquired Acetum Balsamic vinegar last year, and is reaping the rewards already after it helped the division post a 9.5% rise in margins. Ovaltine and Twinings have both grown strongly  in important markets like Switzerland and Thailand, helped by an intensive marketing strategy. Thanks to its Kingsmill bread products, the group has increased its market share in the private label bread market, and the loss at Allied Bakeries is being reduced.

Weaker EU sugar prices was the reason behind the drop in profit at the sugar business. The company anticipates further volatility in the sugar market, but it does have a competitive advantage, as it has the lowest cost base of all the EU sugar producers. 

Associated British Foods (ABF) enjoyed record sales from its retail arm Primark during the Christmas period, but its sugar business took the shine off those figures – and this has been a common theme with the group.

The sugar division has often lagged behind the clothing department, but this time it is a sector-wide issue and not just company-related. The EU removed its sugar cap in September 2017 – for the first time in nearly 50 years, and the bumper harvest has weighed on the price.

In fact sugar prices have recently fallen to levels not seen 2015, and with the caps being scrapped, this bearish trend is likely to continue. As a result, Associated British Foods’ sugar division may continue to underperform.

Savvy British consumers are still turning to Primark for bargains though. The budget clothes chain is still drawing customers at a time when the overall retail environment is struggling. It is all the more impressive that Primark is racking up stellar sales when they don’t have an online shopping facility. The fashion house has a website, which showcases their items, and it will point you to your nearest store, but transactions can only be completed in-house.

According to GlobalData, Primark has grown faster than any of the top 10 clothing companies in the past five years. The fashion division is growing at a respectable rate, and the strong performance is all the more impressive when you take into account how its competitors are doing. Next described 2017 as the ‘toughest in 25 years’ after it posted a second consecutive annual loss. H&M went down the route of deep discounts in order to entice shoppers, and it resulted in a 44% drop in first-quarter profit. Zara owner, Inditex, saw profits rise, but at a slower pace. British consumers are being squeezed as inflation continues to outpace the earnings growth rate, but Primark is holding up well.

The grocery side of the business hadn’t been performing too well previously to this latest update – in line with the rest of the sector. Across the board, tea sales are in decline as herbal tea and coffee become more popular, but Twining offers a range of herbal teas, so is keeping up with the trends.

The company generates more than 60% of its revenue and profit from outside the UK, which highlights how diversified the business is. The well-balanced business model will stand ABF in good stead should some of the markets turn softer.

The international nature of the business means there is some uncertainty in relation to the UK’s exit from the EU. The transition period that kicks in March 2019 has reassured the business world somewhat, but trade talks will crucial. Associated British Foods are involved in government-led consultations about the potential impact.   

John Bason, the group’s finance director, isn’t worried about the sugar-tax the government is levying on certain products. Mr Bason believes that sugar is a well-integrated ingredient in western society and doesn’t foresee any major change from the company’s point of view.

The share price has been broadly pushing higher since 2009, and if the positive moves continues it could retest 2945p (200-week moving average). A break below 2336p, might pave the way for 2100p to be targeted.

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