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Associated British Foods results undermined by sugar

Weak sugar prices will be offset by a strong performance of its budget clothing business Primark, according to Associated British Foods’s (ABF’s) pre-close trading statement, covering the first half of its financial year to March 1 2014.

“Adjusted operating profit for the first half is expected to be in line with last year,” said the firm. “A much lower profit from sugar will be offset by another excellent performance from Primark and encouraging results from grocery and ingredients.” 

City analyst Panmure Gordon predicted profit before tax would rise by 2.9% to £461M – partly reflecting lower interest costs – with earnings per share rising by a “healthy” 7.2% to 44.5p.

Graham Jones, Panmure Gordon executive director equity research, maintained the analyst's full-year earnings per share forecast of 102.0p, which equated to 4% growth. But he lowered the 2015E forecast from 111.6p to 109.0p, to reflect an expectation that currency and sugar price weakness would more than offset Primark gains.

‘Cashflow has been impressive’

“Cashflow has been impressive, with first half net debt expected to be £0.9bn, £0.4bn lower than last year”, said Jones.

ABF attributed the weaker sugar performance, with falls predicted in both revenue and profit, to the planned reduction in EU sugar prices, ahead of reform of the sugar regime in 2017. But the fall in price was proving faster than expected, it added.

Also, the world sugar price had also fallen to what ABF said was “an unsustainably low level, putting further pressure on industry revenues and margins”.  That will be reflected in AB Sugar's results, particularly in China.  First half sales volumes for Spain, Illovo and China would be lower than last year, it predicted.

But, despite early season concerns, the UK crop was good, rising from 1.15Mt last year to 1.3Mt.

“For the full-year we have cut our divisional [sugar] earnings before interest, tax and amortisation [EBITA] forecast from £295M to £275M reflecting both currency and underlying weakness,” said Jones. “And for 2015E we cut our forecast more dramatically, from £280M to £220M reflecting a full-year of these factors combined with the existing £30M increase in UK beet costs.”

ABF said grocery sales were slightly lower in actual currencies, but ahead in constant currencies. Twinings Ovaltine was said to have performed well, while Allied Bakeries continued to improve sales and margins, despite a fiercely competitive UK bread market.

‘Silver Spoon’s sales were down’

Silver Spoon’s sales were down, due to lost contracts and lower prices, but cost savings were said to have partially mitigated the profit impact. “For the first half, we forecast a strong increase in EBITA from £97M to £125M,” said Jones. “But for the full-year, we trim our forecast from £270M to £260M, reflecting a slightly better underlying performance than expected being more than offset by weaker currencies.”

In ABF’s ingredients business, Panmure Gordon predicted a strong improvement from the breakeven seen last year, to £18M EBITA in H1. The analyst maintained its £35M forecast for the full-year, despite currency pressures, due to improvement in yeast and bakery ingredients.

“In agriculture, we expect H1 EBITA to be in-line with last year at £18M, with lower feed volumes in the UK having been offset by growth in China and another strong performance from AB Vista,” said Jones.

ABF will post its half year results on April 23.

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