AB Foods' Q1 revenues flat as Primark growth offset by sugar, FX - UPDATE

16th Jan 2014 07:00

- Revenues flat as Primark offset by weakness elsewhere- Sugar revenues drop 28 per cent- FX limits revenue growth- Full-year expectations unchangedAssociated British Foods (ABF), the food ingredients company and owner of the Primark retail chain, said that there has been no change in its expectations for the full year despite a mixed performance in its first quarter.The company said that the profit decline in its Sugar division will be "greater than previously expected" due to a reduction in sugar prices, but higher-than-estimated margins at Primark should help make up the difference. As such, adjusted earnings per share for the financial year ending September 14th are still expected to be similar to the previous year.Total group revenues in the 16 weeks to January 4th were unchanged year-on-year, with continued strength at Primark following "excellent Christmas trading" offset by weakness elsewhere, especially in Sugar.Foreign exchange (FX) rates also limited growth during the period as sterling gained against most other major currencies with the exception of the euro.At constant currency rates, group revenues would have grown by 1%, but ABF warned that the "impact for the rest of the year will be more significant" if sterling stays at its current rates.Primark sales grew by 14% year-on-year in the first quarter, helped by an 8% increase in selling space, strong like-for-like (LFL) growth and higher sales densities from new stores. ABF admitted that LFL sales at Primark were held back in the first eight weeks due to unseasonably warm weather but growth was "very strong" in the second half of the period and was hailed by brokers as a "remarkable", "sparkling" performance especially as the chain still has no online presence.The combination of LFL growth and further store expansions should lead to strong full-year profit growth and margins higher than expected, the company said.In contrast, Sugar revenues were down by 28% due to falling sugar prices in the EU and further abroad."Lower sugar prices, as the market rapidly adjusts ahead of EU regime reform in 2017, will result, as previously indicated, in a substantial reduction in profit from our sugar businesses this year.  With the further recent fall in world sugar prices this reduction will now be greater than previously expected," ABF said.Looking at the company's other divisions, Agriculture revenues were level with last year, Grocery sales were down 1% and Ingredients revenues fell 2%.Although profits guidance was broadly unchanged, analysts at Jefferies are now modelling an improved margin trajectory at Primark, lifting earnings before interest and tax (EBIT) 20 basis points (bps) year-on-year from a 40bps fall previously, and have further downgraded sugar EBIT from £340m to £308m for the current year, as well as reflecting greater FX headwinds. The broker said Primark was "the most compelling growth retailer of scale, but fairly valued for now". "Long-term investors may find it easier to look beyond near term valuation constraints. However, the current valuation requires a little bit of catch-up in the earnings base."Panmure Gordon hailed the impressive start to the year, once again at Primark, but also with an improvement in both Australia and Ingredients showing through, and increased its target price to 2,500p and maintained its 'hold' stance. "Yet again, Primark has entered a country - this time France - to an enthusiastic reception, and this only strengthens our conviction that Primark has a decade of strong growth to come from store roll-outs across Europe." Shares in ABF were down 3.8% to 2,593p at midday on Thursday. BC