ABF Sugar High Continues As Primark Slows

ABF continues to benefit from the revival of raw sugar prices whilst a spike in high street activity around a sunny Easter kept retail challenges at bay in the third quarter. Despite Primark performing “a lot better than H1” however, ABF still only sees the outlook for the remainder of the year as only marginally improved.

No Primark markdown yet

Looking at the Thursday’s share price rise of as much as 180p, investors are instead focusing on impressive 13% growth in group revenues at constant currency, and also at Primark this year, though at the latter it was partly flattered by a comparable effect against last year when Easter was earlier and the weather was worse.

Ambiguity about the retail business’s underlying performance is also visible in its weaker margin. That fell 170 basis points to 10%, pressured by dollar-denominated input costs. High street clothing rivals have seen similar or worse sterling impact, but few are scaling up space internationally at Primark’s rate. The group’s decision to push ahead with international space expansion—1.5 million square feet planned in total for the current financial year—looks like a bet that the pound will stabilize. Increased exposure to the euro and the dollar may not be taken lightly if the pound wilts again.

ABS still energized

For now, Thursday’s investor reaction is all about sugar. Prices have in fact declined off the highs of last year, but the group notes AB Sugar already has commitments for most remaining current-year contracts in the EU. We also note U.S. and London futures have stabilized in recent weeks. Furthermore, the removal of tens of millions of pounds in sugar manufacturing costs over the last few years can offset a moderate price decline in 2017/18. As for next year’s UK production, which will be the first outside of the EU’s quota, it is “well established” from a planted area that is a third higher. Production also points higher in Africa and China, though the latter recently announced new duties.

Still, the scene looks set for a continuation next financial year of the current transfer of underlying growth from Primark to ABS. This is staving off investor concerns about the reversal of Primark growth as its low-cost model is pressured, exposure to U.S. dollar input costs and potential supply chain disruption in one of the largest food production operations in Europe. ABF stock is outperforming rivals on both the high street, where shares are in the red for the year, and in food production, like Tate, from which ABF’s stock recently diverged. The group needs its sugar high to last.

Does ABF’s chart show more conviction among investors who pushed the shares as much as 6% higher on Thursday than we have? Not particularly.

• Note the very long wick of the bar that represents Thursday’s trading, showing thin volume at all but the lowest prices, well below 3000p
• It looks like the surge completed a long overdue gap-fill to correct a 68p break in the spread on 12th September, when the stock fell 11% in reaction to disclosure of Primark weakness in a trading statement ahead of full-year results
• The lack of follow-through makes Thursday’s jump seem less impressive as at first glance, particularly given that the shares were settling for the day with a gain of less than 2.5% , well off their earlier rise
• The stock has also traded for most of the session well below the high on that day in September (3061p) when they fell the most in more than two months
• The stock created another such gap on Thursday, and weak follow-through suggests it could be filled in the very near term
• The impression of resistance is backed by the stock not managing to rise much higher than 3031p so far this year, demarcating a range of resistance between the latter and 3061p, which has been respected on Thursday
• As for the downside: short-term and medium-term trend gauges like the 50-day moving average (dotted light-blue line in the chart) point higher, as does the Relative Strength Index (sub-chart) and the latter is not overbought
• That suggests structural support at least, regardless of whether the shares immediately close Thursday’s gap in coming sessions
• Consolidation in May (ellipse) also reduces the likelihood of the stock straying far lower; the 61.8% Fibonacci interval of ABF’s Sept.-Oct. fall has also provided visible support, since late May
• Clearly the loss of that support would pave the way for a much heavier decline whilst upside progress will remain wanting below 3031p-3061p

DAILY CHART: ASSOCIATED BRITISH FOODS

Source: Thomson Reuters and City Index