Global foods, ingredients and fashion conglomerate Associated British Foods' (ABF) guidance for the year to 12 September remains unchanged. Yet the shares trade 2.87% lower at £30.49 on Monday as the Primark, Twinings and Silver Spoon brand owner warns weakening emerging market currencies will hit operating profits next year.
Read today's pre-close trading update from the running Play of the Week in full here. The statement confirms an in-line finish to the current financial year, expected to show 'a modest decline in adjusted earnings per share' due to a sharp decline in sugar profits and the impact of a stronger pound on translation of overseas earnings.
Yet investors appear rattled by a softer profit outlook for 2015/2016, with adjusted operating profit set to feel the force of emerging market currency devaluations. 'Since our half year, and particularly in recent weeks, local currencies in our emerging markets have weakened significantly,' concedes ABF, warning that 'if current rates persists we expect an adverse effect on adjusted operating profit next year.'
Moreover, it appears profitability will also be curtailed by the lack of a profit rebound in sugar and the impact of US dollar strength on margins at budget fashion phenomenon Primark; the jewel in the ABF crown sourcing much of its merchandise in the greenback.
Jefferies this morning pegs back numbers only recently upgraded, though it sticks with its 'hold' rating and £30.10 price target. 'We had expected two factors to underpin some profit recovery at ABF in the coming year: on the one hand, the very significant devaluation in Asian currencies; and on the other, clear evidence of recovering European sugar prices,' it writes.
'However, we are now less hopeful in Primark's ability to prevent further margin slippage in 15/16, with the US$ rally of H1 2015 likely to weigh on sourcing terms for the whole of the coming year. In addition, the recent strong sell-off in EM currencies, if extrapolated into the year ahead, adds a further point of pressure to profits, which we had not accounted for.'
Liberum, a buyer with a £33.40 price target, points out 'FY' 15-16 are transition years for ABF although we expect earnings will rebound strongly by FY' 17 as the EU sugar industry consolidates and sugar profits recover.'
Jefferies does add that 'on a more fundamentally positive note, Primark's first US store is set to launch in Boston later this week, and the group has confirmed that it plans to open 1.5 million square feet of new Primark space in the year ahead (in line with our forecasts).'
An unknown brand stateside, Primark is opening (10 Sep) a 70,000 square foot store at Downtown Crossing in the heart of Boston. The most economically-developed region in the country, the north east has a population of 56 million, or 17.5% of the total US, making it the country’s most densely-populated region. Click here for an in-depth look at Primark's prospects for US success.