FTSE 100 constituent Associated British Foods (ABF) has warned sales and profitability in its sugar division in the years to 30 September 2018 and 2019 will be lower than previously anticipated. This news triggers a 4.7% decline in its share price to £25.90.
The retail-to-food company behind big names such as Twinings, Silver Spoon and Primark has blamed declining sugar prices in the European Union amid excess supply and high production.
Unfortunately the weaker sugar prices expected in its next financial year would represent a ‘substantial reduction’ compared to those achieved this year.
In the 40 weeks to 23 June, sales at Associated British Foods rose 3% when currency fluctuations are stripped away. You have to remember that this figure will include contribution from its retail business. Indeed, if you exclude the sugar operations, sales growth was 6% ahead of last year.
PRIMARK TO THE RESCUE
And it is this retail business which helps to cushion the blow for the business. Primark is forecast to deliver increased profits, driven by higher margins, which are expected to be ‘well ahead’ of last year.
Operating margins in the first half are 9.8%, slightly lower than 10% last year as ‘better buying’ helped offset the impact of the US dollar and slightly higher discounts.
Sales at the value retailer jumped 6% compared to last year (or 7% at actual exchange rates) thanks to an extra 0.8m square feet of retail selling space since last September in Germany, France, Spain, the Netherlands and the UK.
Nonetheless, Shore Capital analyst Darren Shirley says revenue growth at Primark missed expectations of 9.2%.
He expects any weakness in the sugar division to be offset by a recovery in Primark’s margins from depressed levels.
‘However, visibility on 2019 is modest at this stage with the weakness in EU sugar potentially leading to lower forecasts,’ comments Shirley.
Investment bank Liberum says the group offers investors compelling exposure to secular growth trends in retail over the next 10 years.
‘In our view, Primark remains well positioned to take market share,’ it adds.
