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Sugar beats expectations at Associated British Foods

By Graham Holter , 08-Nov-2011

Analysts expect sugar division to spearhead further growth
Analysts expect sugar division to spearhead further growth

A stronger than expected performance from its sugar division has helped Associated British Foods to a £757M pre-tax profit.

The figure was down 1% on the previous year due to the closure or sale of businesses, but sales were up 9% to £11.07Bn.

Analysts expect the sugar division to spearhead further growth in the company, whose brands include Silver Spoon, Kingsmill and Twinings.

Chief executive George Weston said AB Sugar had “performed very well this year with revenue ahead by 10%, operating profit up 31% and an increase in margin to 14.8%”.

He added: “This was achieved with a significant increase in Chinese beet sugar production, an improvement in Iberia and the benefit of strong world prices.

“Looking ahead, the combination of an increase in production, a further improvement in our operations and higher sugar prices are expected to benefit our business.”

The group operates 34 sugar plants in 10 countries and is capable of producing 5Mt of sugar and 600Ml of ethanol annually.

High prices

Panmure Gordon analyst Graham Jones reiterated his “buy” recommendation and said that “sugar is likely to remain the key theme for 2012”.

He added that the sugar business profits were “£20M higher than our forecast, despite poor crops in the UK, in Chinese cane and at ABF subsidiary, Illovo”.

World sugar prices remain high and with EU stocks forecast to remain low, the EU price outlook for 2012 looks, in our view, positive. Combined with better crops, we now forecast sugar profits reaching £430M in 2012.”

Darren Shirley of Shore Capital has upgraded his expectations for the next set of AB Sugar profits from £340M to £400M.

2012 is expected to be an exceptionally strong year for sugar profitability, with the UK benefiting from the strong price within the EU market, while a robust global price supports sales in Illovo and China,” he said.

Grocery revenues increased by 7%, adjusted operating profit was 9% ahead and margin improved slightly to 6.8%, according to Weston. “The growth in profit was driven by strong performances from Twinings, Ovaltine and our UK grocery businesses, and benefited from a lower charge for restructuring,” he said.

Challenging

But chairman Charles Sinclair said the market conditions in the coming year would remain challenging. “The outlook for economic growth in developed economies around the world is subdued and we believe will remain so in the medium term,” he said. “We expect continued pressure on consumer disposable incomes.

“However, commodity costs appear to be subsiding although the effect of forward purchasing means that the benefit to the group will not be felt immediately.”

Shirley at Shore Capital described the grocery performance as “robust” but added: “We expect 2011–12 to be relatively subdued as the UK and Australia remain challenging.”

Although Panmure has “nudged up” its forecasts for sugar profits, Jones said it had slightly lower expectations for the grocery and ingredients divisions. He added that, although ABF itself predicts most of its profit growth will come in the second half of the coming year, “we still expect reasonable progress in the first half”.

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