Broker snap: Rising input costs a challenge to AB Foods

5th Nov 2010 10:28

Panmure Gordon expects Primark and British Sugar owner Associated British Foods (ABF) to report a strong set of results on Tuesday for fiscal 2010 but next year things might be a bit tougher. The broker thinks the year to September 30 2010 was "a remarkable year" for the food and retail company, and forecasts earnings before interest, tax and amortisation (EBITA) will show a 46% rise in the Sugar business to £245m, with Primark's earnings up 33% to £335m and the Grocery division's EBITA 20% higher at £230m.For the group as a whole, the broker forecasts pre-tax profit to rise by 24.5% to £816m, driving a 21.2% growth in earnings per share to 70p.While sugar prices are now hitting 30-year highs, the broker maintains that ABF does not have significant direct exposure to the world price. However, "this should keep EU supplies tight next year and it has dragged Chinese prices up significantly over the past month or so, both of which are beneficial to ABF", the broker said.Primark has already stated a like-for-like sales growth of 6% for the reporting period, led by strong growth in both continental Europe and the UK."The sharp rise in cotton and freight costs, combined with VAT rises and a continued weak consumer environment means we forecast an 80 basis points [one basis point = one hundredth of a percentage point] margin squeeze for 2011 to 11.6%", the broker said. "This restricts our forecast EBITA growth to 5% to £353m next year."In Grocery, the broker notes that despite a strong growth expected for the current year, promotional activity remains high "and the sharp spike in wheat costs does suggest margin pressure in 2011".Therefore, the forecasts for next year "have an element of caution" and the broker retains a 'hold' and its 1,125p target price despite an impressive year all-round for the group.