Morning Note: Market news and an update from AB Foods.

Market News

Although the market’s base case is for a reduction in US interest rates, the options market currently shows around a 20% chance of an increase. This follows a string of higher-than-expected inflation data. The dollar strengthened and gold extended losses after its biggest drop in almost two years – it currently trades at $2,310 an ounce.

US equity markets rebounded from their recent slump last night – S&P 500 (+0.9%), Nasdaq (+1.1%) – as geopolitical tensions ease and on optimism that big technology companies will deliver robust earnings this week. Tesla and Visa report this evening.

This morning in Asia, the Hang Seng (+1.7%) was firm, driven by HK-listed Chinese tech stocks. Elsewhere performance was more muted – Nikkei 225 (+0.3%); Shanghai Composite (-0.6%) – while the yen rose after Japan’s finance minister said the environment is in place for intervention if needed, his strongest remarks since the currency touched a 34-year low against the dollar. Kazuo Ueda also offered support by reiterating the BOJ would raise its rates if underlying inflation rises toward the bank’s target.

After hitting a new closing high yesterday, the FTSE 100 is currently trading up another 0.5% at 8,070. UK government borrowing was higher than expected in March – £11.9bn vs. £10.2 forecast – potentially leaving less scope for tax cuts ahead of the election. Sterling trades at $1.2351 and €1.1580.

The European Central Bank may cut borrowing costs by more than 100 basis points in 2024, Mario Centeno told Econostream Media. He sees inflation falling below 2% in the coming months. Christine Lagarde reiterated that Europe and the US should avoid a subsidy race in their bids to boost growth.

Source: Bloomberg

Company News

Associated British Foods has this morning released results for the half-year to 2 March 2024 which were better than market expectations. The group benefitted from the restoration of some normality in its markets and supply chains and has issued upbeat guidance for the full year. In response the shares are up 9% in early trading.

ABF is a diversified international food, ingredients, and retail group with sales of almost £20bn. It has significant businesses in Europe, Africa, the Americas, Asia, and Australia, including value fashion retailer Primark, enzyme and yeast products, sugar, Twinings, Ovaltine, and other agricultural products. The group’s capital allocation policy is to invest in its businesses at an appropriate pace and wherever attractive returns on capital can be generated.

During the 24 weeks to 2 March, revenue grew by 5% at constant currency to £9.7bn, driven by continued good momentum in Retail and the food businesses. Adjusted operating profit soared by 46% to £951m, reflecting strong margin recovery back to more normal levels.

Grocery performed well, with revenue up 5% at constant currency to £2,124m. The business enjoyed a significant profitability improvement (+39%) led by US-focused brands and reduction of losses in Allied Bakeries. In Ingredients, revenue edged up 1% to £1,056m, with 19% profit growth, driven by continued strong performance in AB Mauri (yeast and bakery ingredients). In Agriculture, sales fell 9% to £850m, although profitability rose by 27% due to lower input costs. In Sugar, sales rose by 9% to £1,170m, with profit up 74% driven by better performance at Vivergo, the group’s bioethanol plant in Hull.

Primark trading was good overall with sales up 7.5% to £4.5bn, Like-for-like (LFL) sales grew by 2.1% driven by good performance across most markets due to pricing and well-received product ranges. The unit enjoyed a significant increase in adjusted operating profit, up 46% to £508m, with margin recovery from 8.3% to 11.3%, driven by a significant improvement in product gross margin, driven by lower material and freight costs and the annualisation of prior-year price increases.

ABF is financially strong with good cash generation and substantial liquidity. Free cash flow of £468m was driven by profit growth and a significant reduction in working capital outflow. This compares to an outflow of £510m last year. The group ended the half-year with total net debt (including lease liabilities) of £2.5bn and leverage of 0.9x.

The interim dividend has been raised by 46% to 20.7p. The group is currently undertaking a share buyback programme – the final £56m of first £500m tranche and £225m of the second £500m were completed in the period.

The group has delivered a strong first half performance and is on track to deliver significant growth in both profitability and cash generation ahead of expectations at the start of this financial year. Grocery is expected to continue to perform well, supported by a step-up in marketing investment, although the strong profitability of the US-focused brands is expected to normalise somewhat towards the end of the second half. In Sugar, the substantial improvement in profitability is expected to continue, benefitting from a more typical beet crop. Ingredients is now expected to perform well this financial year, driven by AB Mauri, while Agriculture will grow as markets improve and acquisitions are integrated. Primark is expected to continue to perform well in the second half driven by the store expansion programme and the modest levels of LFL growth, with the focus on driving volumes. A moderate improvement in adjusted operating margin is expected in Primark in the second half compared to the first half.

Source: Bloomberg