Associated British Foods (GB:ABF) is a name most Britons haven’t heard of, but which is a gigantic presence in the retail industry in the UK.
The company owns a diverse portfolio of brands, including fashion chain Primark along with food and drink brands such as AB Sugar, Jordans, Blue Dragon, Twinings, Ovaltine, Jordans, Mazola, Rajah, Tip Top, and many more.
The company is not immune to the ongoing headwinds in the economy – and shares nosedived after the company issued a profit warning earlier this month.
The stock has been trading down by almost 35% so far this year.
The weak link
ABF’s affordable fashion brand Primark has been facing challenges in the last year. Primark’s sales are strong, and the company is expecting a 40% growth on last year’s numbers. The sales are mainly driven by higher price points and more retail selling space.
However, despite this, the margins are squeezed due to higher costs and the U.S. dollar gaining strength against sterling and the euro.
As the company refuses a further price hike, it expects an operating profit margin of 8% for Primark in the second half of 2022 and lower than that in the next year. This remains a worrisome point as Primark contributes the a large amount to the company’s overall profits.
The upside
On the plus side, Primark is on track to launch its Click and Trial service in the UK during the holiday season, which could offer the retailer a boost.
It is focused on 25 stores with a better range of products in this trial, which it hopes will lead to improved sales.
Also, as consumers tighten budgets, the demand for low-cost lifestyle products will increase, which will work in Primark’s favour.
The company’s food segment is performing well, with profits in line with expectations. The company also has planned investments in growth initiatives and higher marketing spends to further increase sales.
The company’s cash position is strong enough to manage through these short-term hits on profits. ABF further enhanced its liquidity with the issuance of a 12-year inaugural bond for £400 million in February 2022.
Perfect Smart Score
ABF has a ‘perfect 10’ on the TipRanks Smart Score tool. That means the stock has the potential to outperform the market in the long run.
According to this tool, a score between one and ten is assigned to the stocks based on certain market factors such as analyst ratings, new sentiments, technical analysis, fundamentals, and more.
Associated British Foods share price forecast
According to TipRanks’ analyst consensus, ABF stock has a Hold rating. The company has a total of 13 ratings, including three Buy, nine Hold, and one sell recommendations.
The ABF price target is 1,629.6p, with a high and a low forecast of 2,300p and 1,380p, respectively. The price target implies around 23% of the upside potential.
Conclusion
ABF, being part of the retail sector, is going through some short-term problems, which are affecting share prices as well.
However, analysts expect the headwinds to pass and the company to generate solid profit growth in the longer term. The stock is trading at a 10-year low point, making it all the more attractive.
