7th Jul 2016 08:45
LONDON (Alliance News) - Associated British Foods PLC on Thursday said its full-year outlook has improved due to sterling weakness after the UK's European Union referendum, while reporting growth in revenue in the first 40 weeks of its financial year.
Shares in AB Foods were trading up 8.6% at 2,772.00 pence on Thursday morning, the best performer in the FTSE 100.
AB Foods, which owns discount fashion retailer Primark, British Sugar and agriculture and consumer goods businesses, had been facing falling revenue across the business and a deteriorating profit margin in the retail business in recent times as it suffered from the effects of the weak euro against a strong US dollar and sterling.
However, at the time of its first-half results in April, the company said foreign exchange translations may no longer have a "material impact" on its full year after sterling started to weaken, and that adjusted earnings per share would only decline marginally.
On Thursday, AB Foods reiterated an improved outlook for the full year after sterling weakened even further following the UK's decision to leave the EU last month, but this time said it expected to see no decline in adjusted earnings per share.
"Following the result of the EU referendum, sterling has weakened further and at these rates we expect a bigger translation benefit in the final quarter with no material transactional effect. As a result, our outlook for this financial year has improved, and we no longer expect a decline in adjusted earnings per share for the group for the full year," AB Foods said in a statement.
Numis noted that unfavourable exchange rates had initially been anticipated to hit full-year profit by GBP25 million, which was later decreased to GBP10 million, and the broker now expects no profit reduction from exchange rates.
The company did note on Thursday that the Brexit vote has "created uncertainty in the business environment and financial markets", but said it undertakes relatively little cross-border trading between the UK and the rest of the EU, with Primark operating discrete supply chains for its stores in each of the UK, US and eurozone.
If exchange rates continue as they are, this would have both a positive and negative effect on profit in the next financial year, AB Foods said, expecting to see an adverse transactional effect on the profit margin on Primark's UK sales, but a favourable transactional effect on British Sugar's margin and a translation benefit on group profit earned outside the UK.
In the 40 weeks ended June 18, group sales grew by 1% year-on-year, having declined by 2% in the first half. AB Foods said the third quarter experienced a particularly strong performance, achieving 7% sales growth, due to a translation benefit from the weak pound against most of the company's major trading currencies.
In retail, sales at Primark rose by 7% in the third quarter, with growth driven by increased selling space as well as sterling weakness. Like-for-like sales in the last 16 weeks, however, were hit by "unpredictable weather patterns" with an especially cold April followed by a return to more normal weather in May. Third-quarter operating profit margin was 11.9%, in line with that of the first half.
AB Foods said it opened 11 new Primark stores in the third quarter, increasing the size of the total estate to 310 stores.
Liberum said expansion at Primark will help to double sales and profit over the next five years.
In the sugar division, revenue was higher at constant currency, beating AB Foods' expectations, but the company didn't comment on the reported currency level. It said European sugar prices were strengthened by an increase in world sugar prices and a reduction in EU stock levels. AB Foods did say, though, that there will be no material impact on sugar profit from the improvement in pricing until next year due to most of British Sugar's current year contracts already being agreed.
"Despite short-term concerns, ABF's long-term fundamentals appear robust and we retain our conviction that Primark and Sugar will power mid-term profit growth," Liberum said.
Meanwhile, "some improvement" in revenue growth was seen in the grocery business in the third quarter, with Twinings Ovaltine making further advances in its biggest markets of the UK, US and Thailand.
The ingredients business continues to build on the improvement of the last two years and operating profit remains "substantially ahead", AB Foods said, but revenue in the agriculture business continued to decline due to low commodity prices and lower volumes in UK feed.
By Karolina Kaminska; [email protected] @KarolinaAllNews
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