21st Apr 2015 09:47
LONDON (Alliance News) - Associated British Foods PLC Tuesday reported a drop in profit in the first half of its financial year as its food business, particularly the struggling AB Sugar, made lower sales due to food price deflation and the strength of sterling.
The group reported a 51% drop in pretax profit in the 24 weeks to February 28 to GBP213 million from GBP434 million the year before, but a revenue increase of 1% to GBP6.2 billion.
AB Foods said that while it made "significant progress" in operating profit for Primark, Agriculture and Ingredients and further improvement in the Grocery division's margin, profitability at AB Sugar was substantially lower as a result of much weaker EU sugar prices.
Revenue in the food businesses was hit by food commodity price deflation, particularly in sugar, and sterling was stronger against most of the company's operating currencies, excluding the dollar, AB Foods said.
AB Sugar, which has been struggling for some time, made an operating profit loss of GBP3 million, compared with a GBP64 million profit in 2014, while revenue fell to GBP928,000 from GBP1 million.
However, the company expects a "small profit" for the full year, saying that EU sugar prices appear to have stabilised slightly in recent weeks, although world sugar prices remain at a low level.
It said AB Sugar's results for the second half of the year will benefit from further performance improvement initiatives and the "non-recurrence of last year's cost of restructuring the EU sugar business", but margins will be reduced on British sugar's euro-denominated sales contracts with the euro at current low levels against the pound.
AB Foods added that overhead reduction initiatives are in process and agreement has been reached with UK and Spanish growers for a lower sugar beet cost next year, which will "go some way to offsetting the effects of low sugar prices and the structural change in the euro/sterling exchange rate".
On the retail side, the group noted that discount retailer Primark's performance was driven by significant expansion of selling space and "superior trading" by the stores opened in the past 12 months, adding that plans for its entry into the north east of the US are well advanced.
Primark's operating profit in the first half was 8% ahead of last year at GBP322 million from GBP298 million, as sales increased to GBP2.5 billion from GBP2.3 billion. However, like-for-like sales were level with last year, held back by the unseasonably warm weather across northern Europe last autumn and the "impact that opening new stores in the Netherlands and Germany had on existing stores in this region", AB Foods said.
Ten Primark stores were opened in the period, including four in the Netherlands, three in Germany, and the relocation of the Northampton store to larger premises. Further store openings or extensions to existing stores will take place in Germany, Belgium and the UK in the second half, the group said.
AB Foods said it will pay an interim dividend of 10 pence per share, up 3% from the year before.
"If the current euro weakness against sterling and the US dollar persists, this will have an impact on the group's operating profit for the remainder of this financial year and a greater impact next year," Chairman Charles Sinclair said in a statement, adding that the company also expects a much lower underlying tax rate for the full year compared with last year's rate, and a "modest decline" in adjusted earnings per share for the full year.
Analysts, however, remain positive saying Primark's strength should offset the underperformance of AB Sugar in the current year and lead to better results in 2016 as it expands in the US.
Berenberg analyst Fintan Ryan believes that as sugar profits bottom out this year, AB Foods should be able to maintain mid-teen earnings per share growth rates driven by the strength of Primark.
Liberum says 2015 is a transition year for AB Foods and that while sugar prices could fall further, there are early signs of prices starting to stabilise.
"We estimate that Primark can double sales and profits over the next five years augmented by the occasional store parcel similar to the recent deal signed with Sears in the US," says Liberum analyst Robert Waldschmidt, who expects AB Foods 2016 earnings per share to rebound sharply, up by 15%.
AB Foods shares are down 4.2% at 2,742.00 pence, the worst performing stock in the FTSE 100 Tuesday morning.
By Karolina Kaminska; [email protected] @KarolinaAllNews
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