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Less catwalk swagger for AB Foods

The food to fast-fashion conglomerate is not getting a rush from its sugar business
September 8, 2015

The sprawling Associated British Foods (ABF) is fighting on a number of fronts. On the catwalk, its clothing retailer Primark is facing an issue with margins, which it said in a trading update earlier this week would be "lower than last year" partially due to US dollar strength. The greenback's rise is an issue given Primark's growing presence in countries which use the euro. ABF added a "good proportion" of the impact had been mitigated by its buying teams.

IC TIP: Hold at 3,135p

Then there is the challenging sugar market. According to its 2014 full-year results, sugar is solidly the group's second-largest business, contributing £434m of adjusted operating profit last year compared with £513m for retail, its largest business. So the fact that revenue and operating profit will "again be substantially lower" in sugar than last year is not good. The group has tackled costs, it said, but lower sugar prices have outweighed the efforts. And while it expects to see some price recovery in the EU, it stated world prices declined below 11¢ per pound, the lowest for more than six years. Prices in China provide a bright spot, but UK sugar production was weaker due to a reduced cultivation area.

Its agriculture and grocery businesses seem to be firing strongly, though, with the group predicting better profits than last year. The former is set to have "another record year" thanks in part to strong UK feed volumes in spite of "continued pressure on the dairy sector". Grocery, meanwhile, has benefited from Twinings Ovaltine growing market share in the UK and southeast Asia, as well as Silver Spoon winning two supply contracts with major UK retailers.

 

Numis Securities says...

Hold

The update is one we would expect but we note a shade more caution with regards to foreign exchange, which is now expected to impact the group to the tune of £30m as opposed to the previously indicated £25m. This is due - especially recently - to local currencies in emerging markets weakening significantly. Prior guidance for a modest decline in EPS for the full year has been reiterated with the blow softened by lower finance costs and a lower tax rate. Net debt will also be below last year's £446m level, aided by lower capital expenditure.

 

Canaccord Genuity says...

Sell

We remain cautious on the stock in spite of recent share price weakness. EU sugar prices remain weak with management saying while it is hopeful prices are near the bottom, the significant volatility is likely to continue. Importantly competitor Sudzucker recently issued a profit warning based on weak pricing outlook and Tate & Lyle also just sold its stake in an EU isoglucose business to ADM, citing the uncertain operating environment in the EU sugar market. Elsewhere, Primark's margins in the medium term are another unknown. They peaked back in 2006 and have ranged between 12 to 13.6 per cent. Recent margins are at 12.6 per cent but management sounded moderately more cautious.