Investors have not missed the boat with Associated British Foods (ABF) despite a 30% year-to-date share price rally. The diversified food, ingredients and retail conglomerate is churning out good news and we see further upside for the shares.

A broad-based growth business returning capital to shareholders through progressive dividends and buybacks, the group has passed through the worst of cost inflationary pressures. Shares sees a period of significant earnings growth ahead driven by margin recovery at its discount fast-fashion chain Primark and in groceries and sugar, as well as profit improvement in its ingredients business.In its latest trading update (12 September), the £15.8 billion group nudged up operating profit guidance for the year to 16 September 2023 on the back of a better-than-expected performance from its global sugar production business, which the FTSE 100 firm expects to deliver a ‘substantial improvement’ in profitability in full year 2024.

The Weston family-controlled conglomerate also provided a positive current year outlook for Primark, where the adjusted operating profit margin is expected to ‘recover strongly’ due to falling material costs, the weakening of the US dollar against the pound and euro, and lower freight costs.

The outlook for Primark remains favourable with the discount fashion chain continuing to take UK market share during the cost-of-living squeeze. Primark is opening new shops across Europe and the US and expanding its click and collect trial to include more products.

The resilient budget retail brand’s sales for the year just-ended are expected to be around £9 billion, up 15% year-on-year with like-for-like growth of 9% driven by higher average selling prices, well received ranges and strongly performing new stores.

Elsewhere within the group, Associated British Foods expects its sugar arm to see improved profits in the current financial year aided by an improved sugar beet crop in the UK. The company also continues to see ‘strong’ sales growth in its food businesses, with international grocery brands such as Twinings, Ovaltine, Blue Dragon and Patak’s continuing to perform well.

Liberum believes Primark is underappreciated by the market with an implied price to earnings valuation discount of circa 30% to its peers.

For the year to September 2024, the broker forecasts group earnings per share of 162p and a 54p dividend, rising to 180p and 59.9p respectively in 2025. On those 2025 estimates, the shares trade on a mere 11.5 times earnings and offer a near-3% yield. That looks great value for what is a well-run business with plenty of positive tailwinds.

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