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LONDON (Alliance News) - Associated British Foods PLC on Thursday said its results for the full year will be harder hit than expected by the weak euro, as revenue in the first 40 weeks was flat at actual rates amid continued tough trading in its sugar business, which offset a still-buoyant performance by discount fashion retailer Primark.
The FTSE 100-listed group, which owns Primark and British Sugar and which operates an agriculture and consumer goods arm, said group revenue for the 40 weeks to June 20 was flat year-on-year at actual currency rates and up by 2% in constant currencies, as the weakness of a euro against a wide basket of currencies hit its results.
AB Foods said it expects the weakness of the euro to impact on its full-year results for 2015 more than previously anticipated, with currency translation set to hit its profit by around GBP25 million.
However, amid still good trading at Primark and signs of a stabilising sugar market in the European Union, AB Foods shares were up 4.9% to 3,074.26 pence late morning on Thursday, the best performer in the FTSE 100.
Primark sales rose by 9% in the period, and by 13% in constant currencies, driven by an 8% increase in selling space and high sales densities in stores it has opened in the past year. But the group warned that as Primark sources much of its merchandise in dollars, the strength of the US currency against the euro will reduce its margins this year. It added, however, that a good proportion of this hit has been mitigated by the buying teams at the retailer as they secured orders for next year.
Like-for-like sales were in line year-on-year, held back by the new stores opened in the Netherlands and Germany in the period. Its stores in Spain, Portugal and Ireland all performed "very strongly", while its UK arm continues to produce like-for-like sales growth. Primark's French stores also have traded very well, the group said.
Retail selling space for Primark has increased by 0.6 million square feet since the start of AB Foods' financial year, with 287 stores and 10.8 million square feet in operation at June 20. The group is planning to add a further 0.3 million square feet by the end of its financial year in August, with preparations well underway for its first store in the US, located in Boston, which is due to open in September. It also intends to open three Primark stores in Italy, starting in early summer 2016.
Trading in the grocery and agriculture businesses also remains on track, but AB Foods said the woes in its British Sugar arm continue to bite. While its 2014/15 campaign produced 1.45 million tonnes of sugar, the new crop for the 2015/16 season, despite progressing well, is expected to see sugar production fall to 1 million due to a reduction in the area under cultivation of 20%.
Amid falling quota sugar stocks, the EU market has shown some signs of recovery, though this has been moderated by reduced global sugar prices. Delivered beet costs for the 2015/16 campaign will be around 20% lower year-on-year. Talks for the 2016/17 UK beet price have now been completed, AB Foods said, and will see a further substantial cost reduction.
For Illovo Sugar, AB Foods' South African subsidiary, operating profit for the financial year to the end of March 2016 is expected to decline. A continued drought during the growing season in South Africa has resulted in a cut to production forecasts, while export markets for the company continue to be very challenging. Illovo will continue to focus its efforts on domestic and regional sales in order to mitigate the impact of lower global commodity prices.
In China, however, there has been a recovery in market prices and the profitability of the sugar business in the country has improved. AB Foods completed talks to sell the BoCheng beet sugar factory in Heilongjiang earlier this year and expects to complete the sale soon. As a result, the cost AB Foods will book from ceasing operations in that area will fall by GBP17 million to GBP99 million.
Elsewhere, AB Foods said wheat-fed bioethanol company Vivergo Fuels Ltd, in which the company acquired a 47% stake from FTSE 100-listed oil giant BP PLC in May, may be run at a loss in the short-term due to the weakness in the bioethanol market at present. The business is a joint venture between AB Foods and US chemicals company DuPont.
However, as inclusion levels in fuel gradually rise towards EU-mandated targets by 2020, the European ethanol market should move from a surplus to a deficit, with a corresponding rise in prices, the company said.
In its grocery arm, AB Foods said trading for its Twinings Ovaltine hot drinks brand has been strong, with profit rising since the midpoint of its financial year, while its meat business at George Weston Foods in Australia has improved in line with the company's expectations, with lower raw material costs, higher volumes and lower production costs. Allied Bakeries, which owns the Kingsmill sliced bread brand, is increasing its volumes and has been working on rebuilding the presence of Kingsmill in Tesco PLC grocery stores, though margins in the unit remain under pressure.
AB Foods said trading in its ingredients and agriculture business is solid, with profit still recovering in Ingredients and Agriculture maintaining the robust momentum seen in the previous financial year.
Liberum analyst Robert Waldschmidt said the broker sees 2015 and 2016 as "transition years" for AB Foods and expects earnings to rebound strongly in 2017 as the sugar industry in Europe consolidates and sugar profits recover. He said profitability in the sugar business remains under pressure but said the second half of the year should benefit from cost savings, while noting EU sugar prices have stabilised in recent months.
On Primark, Waldschmidt noted the store opening plans in the US and Italy and reiterated his view that the retailer can double sales and profit over the next five years. "AB Foods offers compelling exposure to secular growth trends in retail over the next 5-10 years," Waldschmidt said.
Liberum has a Buy rating and 3,340 pence price target on AB Foods shares.
By Sam Unsted; samunsted@alliancenews.com; @SamUAtAlliance
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