Associated British Foods boosted by resilient Primark margins and Imperial Brands is out of puff

“There were few fireworks on Bonfire Night as the FTSE 100 consolidated its position after yesterday’s big gains, trading broadly flat. This followed a strong showing in the US and Asia overnight on signs the frosty relationship between the US and China over trade may be thawing. Mining stocks helped support the index for a second day,” says AJ Bell Investment Director Russ Mould.

Associated British Foods

“Associated British Foods is in many ways the last of a dying breed – a real mix of businesses, which is dominated in terms of profile, earnings and growth by discount retailer Primark.

“The key takeaway from the full year results concerns the margin guidance for Primark in 2020 which was materially better than feared.

“Fluctuations in the pound amid Brexit uncertainty impact the balance between what the company pays for its products overseas and what it gets from the UK shoppers which still account for the biggest chunk of its customer base.

“The pressure is ratcheted up still further because Primark’s key selling point is its low prices and if it passed on the costs from exchange rate movements it might alienate loyal followers of the brand.

“Currency volatility is a double-edged sword for the business as the group as a whole generates a significant proportion of its earnings overseas and weak sterling means these are worth more when converted back into pounds and pence.

“The performance of the company’s sugar business has been far from sweet in recent times and these results represent a continuation of that trend.

“However, management seem to be confident earnings have bottomed out here, with the impact of lower costs and improved EU sugar prices expected to come through.”

Imperial Brands

“It’s been a terrible year for Imperial Brands as it suffered from intense competition, political backlash, regulatory uncertainty and market concerns about the health risks from vaping.

“Profit has fallen and management are taking a more cautious view of 2020’s prospects.

“This is a marked difference between the usual messages from the tobacco company which has for years quietly got on with the job and churned out growth in earnings and dividends.

“Vaping and other ‘next generation’ products were meant to be the future for Imperial Brands but growth has been slower than expected. That’s forced investors to question the future earnings potential of the business.

“Imperial Brands has used the word ‘resilient’ nine times in its full year results, as if to try and convince the market that its business hasn’t fallen over as a result of recent problems.

“Sadly it is going to take a lot more than reassuring words to win back the market’s favour. It now pledges to focus investment on next generation products in markets and categories with the best prospects for ‘sustainable and scalable growth’. It begs the question why this wasn’t the focus in the first place as that seems like the obvious business playbook.”

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