Associated British Foods’s sugar results ‘worse than expected’

By Michael Stones

- Last updated on GMT

ABF's sugar results were worse than expected, said City analyst Shore Capital
ABF's sugar results were worse than expected, said City analyst Shore Capital

Related tags Sugar beet

The performance of Associated British Foods’s (ABF’s) sugar division was worse than expected in preliminary full-year results to September 13, according to City analyst Shore Capital.

Operating profit for the sugar division was £189M, reported the food and clothing giant. That compared with the analyst’s forecast of £200M, as the combined impact of lower prices, falling volumes and currency blunted profitability.

The impact was biggest in Europe where prices were driven down by increased market competition, as competitors sought to establish new market positions ahead of the removal of quotas in 2017, according to ABF.

The world sugar price, which hindered EU exports and ABF’s Chinese business, fell further throughout the year. “We consider this to be unsustainable given that it is markedly below the global average cost of production,”​ said ABF. 

Higher beet yields

British Sugar produced 1.32Mt of sugar compared with 1.15Mt last year. Good growing conditions extended into the mild winter, resulting in higher beet yields and sugar content than the previous year. All UK factories were said to have performed well with further progress achieved in improvement initiatives and in health, safety and environmental targets. 

The crop for the 2014/15 was expected to be much larger than that processed in the previous year. 

The beet price payable to growers for the 2014/15 crop was agreed in summer 2013, in a deal that ABF said would cost British Sugar an extra £30M. Talks for delivered beet costs for the 2015/16 campaign have been concluded with a reduction of about 20% on the previous year, which will make a big contribution to ensuring a more sustainable UK beet sugar industry, claimed ABF.

Shore Capital highlighted the recovery in grocery earnings before interest and tax (EBIT) to £269M and a rebound in ingredients, with an EBIT of £41M “though still some way below historic peaks”.

Overall, ABF performed a little ahead of expectations, with current pre-tax profit up by 2% at £1,105M. Underlying earnings per share were also up by 2% to 104.1p. Shore Capital had forecast flat pre-tax profits at £1,085M and earnings per share of 103.3p.

Total EBIT was flat at £1,163M but cash flow from operations was robust, increasing by about 10% to £1,685M after capital investment of £691M. Net debt at year end was reported at £446M, down by £358M year on year. “Hence, ABF has a very strong balance sheet to support its onward growth ambitions,”​ said Shore Capital analysts Darren Shirley and Clive Black.

Large reduction in sugar profit

Reflecting ABF’s warning of a “further large reduction”​ in sugar profit next year, which in turn will lead to a marginal decline in group EBIT, Shore Captial forecast a flat performance year-on-year. But the impact was likely to be offset by much lower tax and interest charges, offering some opportunity to grow adjusted earnings per share.

The analysts retained their ‘hold’ advice on ABF stock.

ABF chief executive George Weston said he was pleased with 6% growth in adjusted earnings per share. 

“Significant progress was achieved in operating profit by grocery, agriculture, ingredients and Primark, all of which substantially out-performed last year,” ​said Weston. “Primark’s trading success and significant expansion delivered another magnificent year.  Much lower sugar prices in the EU held back the group’s profit growth although, operationally, sugar performed well.

“Earnings also benefited from the strength of the group’s balance sheet and effective cash management which resulted in a much lower interest charge than last year. 

ABF has sales of £12.9bn and 118,000 employees in 47 countries. Key business locations are: Europe, southern Africa, the Americas, China and Australia.

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