Analyst Note| Ioannis Pontikis, CFA |
Following its preclose announcement in September, Associated British Foods reported fiscal 2021 results with adjusted profit at GBP 1,011 million versus GBP 972 million in our model, primarily driven by better-than-expected performance at Primark (GBP 415 million reported versus GBP 321 million after repayment of job-retention scheme monies and GBP 275 million in our model) and Sugar (GBP 152 million reported versus GBP 132 million in our model) due to higher prices in Europe and Africa. With all Primark stores now open and mostly operating free of trading restrictions, and absent any reimposition of significant restrictions, management expects trading to continue to improve and sales to increase by at least the GBP 2 billion of lost sales due to store closures over the last financial year (versus GBP 2.5 billion in our model). Management also reiterated its plan to continue expanding selling space next year with the significant growth in sales expected to lead to a sharp improvement in Primark's adjusted operating margin to over 10% (11.4% in our model). In line with the outlook provided in the preclose statement, the company expects operating profit margin to continue to benefit from lower store labour and operating costs with increased supply chain and raw material inflation to be broadly mitigated by currency gains arising from a weaker dollar. We maintain our GBX 2,560 fair value estimate. Our discounted cash flow-derived fair value estimate is slightly lower than our sum-of-the-parts valuation at GBX 2,620 per share, with Primark accounting for about 50% of the group's valuation. Shares at the time of writing reacted positively (up about 8%) on Primark's strong performance, still trading in 4-star territory.