Primark owner Associated British Foods (ABF) has warned of a higher interest charge next year due to lower UK long-term bond yields that will push its pension scheme from a surplus into a deficit.

At current levels, ABF expects a year-end deficit in the UK pension scheme of approximately £200 million.

Shares in the international food, retail and ingredients group are 10% lower at £28.40, despite a positive pre-close trading update.

ABF is performing ahead of expectations in the second half as a result of translation benefits from a weaker pound following the Brexit vote.


Earnings per share for the full year are also expected to be higher due to forward currency purchases and fixed contracts.

The firm says if current sterling exchange rates continue, it will affect the profit margin on Primark’s UK sales, but will benefit British Sugar and profits outside the UK.

Liberum has dismissed short-term concerns and believes that Primark and the sugar division will power mid-term profit growth.

The investment bank is optimistic that Primark can double sales and profits over the next five years, which will be driven by continued expansion on the continent and in the US.

Revenues in the grocery division, including Twinings and Silver Spoon, are expected to be marginally ahead compared to last year with a higher operating profit at constant currency.

Underlying revenue and adjusted operating profit at AB Sugar will also be ahead of last year. Sugar prices have strengthened as a result of reduced EU stock and a rise in prices worldwide, which benefited the Spanish business.

However, due to annual contracts AB Sugar will not benefit from higher prices until 2017.

Unseasonable weather has hit like-for-like sales at Primark, which are 2% lower, while the UK performed as expected during more seasonable weather.

Due to a weaker sterling, sales at actual exchange rates are expected to be 11% higher.

Issue Date: 12 Sep 2016