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Associated British Foods weathers the storm

Created:

21 April 2009

Written by:

Jonas Crosland

Associated British Foods' shares jumped over 6 per cent on the back of these figures after the food and clothing group boosted sales in what chairman Martin Adamson described as the toughest trading period for over 50 years. Moreover, Mr Adamson believes that second-half operating profit is likely to show a modest improvement after dipping 7 per cent to £260m in the first half.

The sugar division reported a particularly buoyant performance - the unit's 21 per cent rise in operating profit to £70m was underpinned by a high yielding sugar crop, higher extraction rates and lower energy costs. There was also a positive translation effect from sterling's weakness against the euro. However, the overall picture was marred by a disappointing performance in China where profits were hit by weak sugar prices.

Trading was also strong at the group's budget retail outlet, Primark - that's benefiting from a squeeze on disposable incomes, which is encouraging consumers to trade down. Sales there rose 18 per cent to £1.07bn, while operating profit grew 10 per cent to £122m. The unit's operating margin, however, fell from 12.3 per cent to 11.5 per cent - reflecting a rise in costs associated with a new distribution centre. Moreover, management says that further margin pressure may come from sterling's weakness against the dollar as many of Primark's garments are sourced in dollars.

The grocery side, which accounts for 35 per cent of group sales, delivered a mixed performance, with turnover up 22 per cent to £1.55bn, but operating profit down from £88m a year earlier to £62m. Much of the decline reflected weaker sales of Mazola corn oil in the US as the company increased prices to recover high corn oil costs. These costs have now been reduced as prices have fallen back, but the company lost money by taking out long positions in vegetable oil futures at much higher levels than the current cost of oil. Profits at both Allied Bakeries and Twinings Ovaltine improved.

Broker Investec forecasts full-year pre-tax profit of £602m and EPS of 52.1p (£611m and 52.9p in 2008).

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For more analysis of company results as they're released, go to www.investorschronicle.co.uk/results