Primark's Europe wobble leaves ABF exposed

Sugar strikes again at ABF.

Sugar low

Sugar strikes again at ABF. No sympathy is forthcoming from investors for the group having underestimated the impact of Europe’s quota removal. Little wonder, with no clear quantification from management of the impact. For now though, an ahead-of-trend high street result helps keep any downward revisions to group revenue forecasts on the moderate side.

Primark space key

Space remains key for Primark. Right now, in parts of the UK and much of economically recovering Europe, limits to store space expansion are minimal given leaseholds remain competitive. 300,000 sq. feet were added to Primark store space between last financial year end and early this month, with a further c.1,000,0000 sq. planned in FY18/19. In other words, constant conditions going forward would be benign for continued underlying retail sales growth. At worst, the low-to-mid single-digit percentage growth per quarter that Primark has achieved almost consecutively for the last two years will continue.

Retail appreciation will return

Since the market implied valuation of the sugar business is below asset value already, we’re compelled to expect appreciation of retail growth to come creeping back. The group is after amongst the retailers widely deemed capable of withstanding a discretionary spending squeeze in their key domestic market. Unseasonal weather in Europe during the trading period obscured a balanced view among investors at the time of writing. But it’s worth noting the shares had settled well off lows by mid-session omn Thursday.

Stuck on sugar

There’s no getting away from signs that ABF’s sugar comedown will be a protracted one. Management is not ready to countenance radical action that would offload the weight from the sugar business on the group’s shares. Note the stock rose as much as 23% last year but ended 2017 with barely a three percentage point gain. ABF is therefore exposed to commodity market forces beyond its control, particularly as group expense management already looks close to optimal. A more stable path for the stock would require that profit forecasts for AB Sugar fall no further than downgrades of as much as 30% on Thursday—there’s no guarantee of that.

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