Delays in EU sugar regime reform are good news for ABF

By Rick Pendrous

- Last updated on GMT

ABF's operations will benefit from healthy pricing and cashflow
ABF's operations will benefit from healthy pricing and cashflow

Related tags: Shore capital analysts, Eu sugar regime, European union, European commission, United kingdom, Eu

Higher beet costs, adverse currency movements and weak prices in China are expected to hit Associated British Foods' (ABF's) profits from sugar in the current financial year. However, medium-term prospects for sugar look good, according to Shore Capital analysts, who predict earnings before interest and tax (EBIT) of £450M this year.

The news emerged following a meeting between ABF's finance director John Bason and Shore Capital analysts Darren Shirley and Dr Clive Black last month.

Shirley and Black reported that while the outstanding £510M EBIT performance for sugar operations in 2011/12 was unlikely to be repeated in the medium term, they believed the prospects for sugar and its continued cash delivery into the group remained "robust"​.

ABF, which produces sugar through its Illovo operations in Africa, China and British Sugar in the UK, told Shirley and Black that any fallback would be modest, as Illovo's performance was improving after a challenging couple of years.

The analysts were upbeat about ABF's prospects in sugar because of the delays expected in reaching agreement on the reform of the EU's sugar regime. Rather than the system ending in 2015, as the European Commission proposes, they thought pressure from the largest producing nations would lead to a compromise and a system rollover to at least 2018.

Such a compromise, they argue, was likely to result in five to six years of healthy pricing, profitability and cashflow from ABF's produce. While EU pricing might ease back if the least developed countries increased production and boosted imports into the EU, with no proposals to change tariffs impacting the largest global producers, the EU would remain a deficit market ahead of any regime change, they said.

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