Sugar left a slightly bitter taste at Associated British Foods after the company said a “substantial reduction” in prices would hit sugar profits this year and in 2019, though the outlook was brightened by stronger trading at retailer Primark.
The UK food-and-clothes conglomerate, controlled by the billionaire Weston family, said in a quarterly trading update on Thursday that profits at Primark would be higher than expected this year. Increased earnings would be driven by operating profit margins in the second half that would be “well ahead” of the 9.8 per cent achieved in the first six months of the year.
John Bason, finance director, said: “Primark trading in the third quarter is very good and margins are, as expected, jumping from where they were in the first half and if anything, our outlook for this year is better than we’d expected before. EU sugar prices are low, so that will have an effect on this year and if they continue like this, they’ll also have an effect on next year.”
For this year, ABF held to its previous outlook for the group of “progress” in adjusted operating profit.
Analysts were left wondering whether the better than expected outlook at Primark — which accounts for 54 per cent of group profits — would be enough to offset the anticipated decline in the smaller sugar business.
Alex Smith, analyst at Barclays, said in a note: “Overall the outlook for the year at group level is unchanged; however we expect the outlook for sugar in full-year 2019 to weigh on consensus.”
The shares closed 4 per cent lower at £25.95, taking the total decline to 11 per cent during the past 12 months.
The shares have been hit by concerns about a slowing pace of space growth at Primark, though the retailer has benefited in the UK — where it makes half its sales — from bargain-hunting consumers trading down. This has boosted its share of the market.
Its revenues were up 6 per cent in the year to June 23, compared with the same period in 2017, driven mainly by new store openings. The UK business had “performed well”, ABF said, with like-for-like sales rising — a rare bright spot on a troubled British high street.
Kate Ormrod, analyst at GlobalData, said Primark was benefiting from weakness at rivals H&M and New Look, adding that its popularity with shoppers “emphasises the strength of its proposition with its recent focus on licensed ranges such as Disney, Harry Potter and Love Island, satiating shopper demand for brands”.
Sugar revenues fell17 per cent in the quarter, which the company said was “entirely the result of significantly lower EU prices, which adversely affected our UK and Spanish businesses”.
ABF said it expected “good profit growth” this year from its other businesses, which include ingredients, agriculture and groceries such as Twinings tea and Ryvita crispbread.
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