Morning Note: Market news and an update from AB Foods.
Market News
US equity markets continued their upward path last night – S&P 500 (+0.2%), Nasdaq (+0.3%) – on optimism about the economy. This morning in Asia, the Bank of Japan maintained its ultra-easy monetary policy. Equity markets were mixed, with the Nikkei 225 a touch lower (-0.1%) and the Hang Seng (+2.6%) and Shanghai Composite (+0.5%) rallying. The Chinese authorities are said to be considering a package of measures to stabilise the stock market. India’s market overtook Hong Kong’s to become the world’s fourth largest, as the combined value of shares listed on the nation’s exchanges reached $4.33tn at yesterday’s close.
The 10-year Treasury yield slipped to 4.09%. Bill Gross has some advice for the Fed: Stop winding down its balance sheet and start cutting rates. He said the central bank should lower rates over the next six to 12 months to avoid a recession. Goldman economist Jan Hatzius said a March interest rate cut “would make sense.”
The UK had it lowest December borrowing since 2019. The government borrowed £7.8bn, down from £16.2bn a year earlier and less than the £14bn forecast by the Office for Budget Responsibility. Sterling trades at $1.2729 and €1.1682, while the FTSE 100 is currently little changed at 7,498. Gold trades at $2,030 an ounce.
The oil price has moved back above $80 a barrel as the US and UK launched new airstrikes against eight Houthi targets in Yemen, in a new escalation. At the same time, the rate for transporting a cargo of gasoline from northwest Europe to the US east coast has almost tripled since the start of the year, nearing $38,000 a day yesterday. Archers Daniel Midland, the agricultural products processor and trader, fell by 24% yesterday following an SEC accounting probe.
Source: Bloomberg
Company News
Associated British Foods has this morning released an upbeat trading update for the 16 weeks to 6 January 2024, highlighting improved profit is now expected to be driven by retailer Primark. In response the shares are up 1% 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.
The Grocery business performed well, with revenue up 5.4% at constant currency to £1,414m. The US-focused brands, including the Stratas joint venture in edible oils, continued their strong performances from last year. Within international brands, Twinings traded well across its key markets. Ovaltine had a strong performance in Western Europe but was weaker overall as it continued to face challenges in Asia.
In Ingredients, revenue edged up 0.9% to £698m. The yeast and bakery ingredients business AB Mauri maintained the strong performance of last year with further growth in sales and profit. As expected, parts of the division were softer due to continued customer destocking. In Agriculture, sales fell 10.8% to £572m, although certain of the compound feed markets are beginning to show signs of recovery.
In Sugar, sales rose by 13.0% to £825m. Processing of the UK sugar beet crop is under way and indications to date are that sugar production will still be significantly above last year despite the recent weather. This should bring production more broadly into line with historical production levels. Vivergo, the group’s bioethanol plant in Hull, had a mixed period of trading but was overall much better than last year. Illovo, the group’s sugar business in southern Africa, also had a mixed period with a combination of production and currency challenges.
Primark trading was good overall with sales up 7.9% to £3376m, with a slow start given the unseasonal warm weather and strong Christmas trading. Like-for-like (LFL) sales grew by 2.1% driven by higher average selling prices. Sales of womenswear and menswear were strong particularly in performance wear, leisure, and tailored clothing and in the Rita Ora collection. In the UK, total sales grew 4.5%, with LFL sales up 3.8%. Primark’s market share reached a new record at 7.1%. In Europe, LFL sales were up by 1.3%, while sales in the US grew by 45% driven by new store openings. The division exited the period with stock levels in a good position and currently does not expect any significant disruption to its supply chain because of the situation in the Red Sea.
As expected at this stage, there is no update on the group’s financial position. However, ABF is financially strong with good cash generation and substantial liquidity. At the last balance sheet date (16 September 2023), the company had total net debt (including lease liabilities) of £2.3bn. The group is currently undertaking the first tranche of a £500m share buyback programme.
Looking forward, the group continues to trade well and expects a year of meaningful progress in both profitability and cash generation, with the profitability improvement being driven by a recovery in Primark margin, a marked improvement in British Sugar profitability, and by reduced losses at Vivergo. The group also feels more confident in the delivery of the Primark adjusted operating margin in this financial year, driven by a further improvement in product gross margin. This should insulate the business against potential additional costs of supply due to the disruption in the Red Sea should they arise.
Source: Bloomberg