Associated British Foods expects in-line first half profits

24th Feb 2014 07:05

- Operating profit to be in line with 2013- Strong Primark sales mitigate poor sugar performance- Grocery and Ingredients revenues improveAssociated British Foods (ABF) said it expects first half adjusted operating profit to be in line with 2013 as a slump in the Sugar business was offset by a strong performance from its Primark stores.The company's revenue and profit from Sugar will be substantially lower than last year, as prices declined. A reduction in European sugar prices ahead of a regime reform in 2017 has been signalled for some time. The world sugar price has also fallen to an "unsustainably low level", putting further pressure on industry revenues and margins.The slide in Sugar earnings has been mitigated by Primark sales, which are tipped to be 13% ahead of the prior year at constant currencies, driven by 4% like-for-like sales growth, a stronger euro and an increase in retail selling space.New store openings have added 8% more selling space since the last half year. The expansion meant group capital expenditure was higher than last year.Like-for-like sales in the first eight weeks of the financial year were held back by unseasonably warm weather and strong comparatives in the previous year, but the rest of the period picked up in the lead up to Christmas. Good working capital performance to improve operating cash flowsOperating cash flows at the group would be helped by improved working capital performance, particularly as a result of better inventory management at Primark.In the Ingredients business, revenue in the first half is projected to be ahead of last year at constant currency, but slightly lower at actual rates with improvement in yeast and bakery ingredients.The Agriculture business is expected to report revenue and operating profit similar to last year at both constant currency and actual rates as lower UK feed volumes were offset by growth in China, and a strong performance at its animal feed arm AB Vista.Grocery revenue is pegged to be ahead of last year at constant currency, but just below at actual rates. Margins and profit will improve with strong sales growth of Twinings Ovaltine tea in the US and the UK. Allied Bakeries will see volumes and margins ahead of last year in the competitive UK bread market. The group warned that the Sterling is continuing to strengthen against all its major trading currencies which will have a more "significant negative effect" on the translation of international results into sterling in the second half."Nevertheless, with a better than expected trading performance from the non-sugar businesses and lower financing costs, we continue to expect adjusted earnings per share for the financial year to be similar to 2013," ABF said.Panmure Gordon ups its price target Commenting on Monday´s trading update analysts at Panmure Gordon highlighted that on their estimates currency headwinds would take circa 5% off the company´s earnings in fiscal year 2014 and offset the strong trading seen in Primark, for which it had upgraded its forecasts. In line with the above, the broker trimmed its fiscal year 2015 estimates for earnings per share by 2.3%, to 109p, to reflect "a full-year of currency and sugar price weakness". Despite the above, Panmure Gordon raised its price target on the shares to 2,760p from 2,500p beforehand. RD