The performance of Associated British Foods' (ABF's) sugar division has disappointed City analysts, while its Primark business continues to shine.
The UK bread market remained 'intensely competitive' with 'some pressure on margins', said ABF
ABF warned in its trading update released today (September 9) that negotiations with EU customers over prices for the 2013/14 marketing year were proving challenging. "An increasingly negative sentiment" was being driven by the higher availability of sugar, with the conversion of non-quota sugar to quota, additional tariff rate quotas for raw sugar imports and low world sugar prices, it said.
Martin Deboo, analyst with City firm Investec, in a comment headed "Sugars bubble deflating", said ABF's comments supported his view that sugar pricing was becoming increasingly tough. Market prices for the financial year 2014 were down by as much as €120/t compared with the mid to high €700/t in the current financial year.
'A strong finish'
But low sugar prices were likely to be offset from "a strong finish" from Primark. The business – which accounts for 40% of profits – remained robust, Deboo said.
"Like-for-like [performance] remains strongly positive, with second half margins 40–50% ahead of our forecast. Expansion continues, with the first store in France due in December."
Investec retained its 'hold' advice on ABF stock.
Meanwhile, City analyst Panmure Gordon cut its 2014 earnings per share forecast by 3.6% and trimmed its price target by 1% from 2,100p to 2,075p but retained its 'buy' advice on the firm's stock.
Panmure Gordon analyst Graham Jones said: "While ABF is likely to deliver a lower level of earnings per share growth in 2014, this is after more than 31% growth over the past two years, and the mix of earnings continues to improve with Primark, we estimate, now accounting for over half group net income."
Jones maintained the analyst's forecast for earnings before interest, tax and amoritisation (EBITA) at £433M – down from £510M last year. The fall reflected higher UK beet costs, lower crops in the UK and Spain and significant losses in China due to lower prices and a £22M charge for the mothballing of two beet factories.
Bread market 'intensely competitive'
He noted ABF's comment that the UK bread market was "intensely competitive" with "some pressure on margins".
Reflecting this Pammure Gordon cut its EBITA forecast for the grocery business from £243M to £233M – albeit still a significant improvement on the £187M registered in 2012.
"Allied Bakeries has seen strong organic growth in addition to the new Co-op supply contract, and Kingsmill is now the number two UK bread brand ahead of Hovis," said Jones.
Twining Ovaltine had continued to perform strongly, and good performances have also been seen at ACH, AB World Foods and Jordans Ryvita.
But star of the show was Primark, he agreed. The business had again delivered ahead of expectations, with total sales rising by about 22% to around £4.27bn. The rise was driven by like-for-like growth of 5% for the full-year, high sales densities from new stores and a 74,000m2 space increase to 836,000m2.
In its pre-close statement ABF said that operating profit for the second half of the year will be ahead of expectations delivered by a strong finish to the year delivered by Primark. "Adjusted earnings per share for the full year will show good progress," it predicted.
ABF plans to announce its full year results, for the 52 weeks to September 14 2013, on November 5.
