Associated British Foods revealed a growing dent to its
fortunes in sugar from the collapse in world prices, which set fresh multi-year
lows, compounding setbacks from European Union reforms.
The tea-to-clothes group, reporting a 28% drop in sugar
revenues for the 16 weeks to January 4, said that a drop in its sugar profits for
the full financial year would "be even greater than previously expected" thanks
to the tumble in world sugar prices.
Raw sugar futures for March on Thursday hit 15.10 cents a pound
in New York, the lowest for a spot contract since June 2010, and down 20% over the
past three months.
London white sugar for March touched $414.00 a tonne, the
weakest since April 2009.
"The further recent fall in world sugar prices may put
further pressure on revenues and margins, particularly in China," the group said.
'Lower revenues and
The decrease in world prices was exacerbating damage to ABF
from European Union sugar reforms, which will, from 2017, scrap production
quotas for the sweetener.
The higher production implied has already shifted market
power to buyers, undermining European sugar prices which are typically above
those on the world market.
"EU sugar prices… were lower in the period, which will lead to
lower revenues and margins, for both the UK and Spain in the full year," Associated
British Foods said, acknowledging its sugar performance was "weaker than
Bigger UK output
The group flagged some positive points for its sugar
division, with UK sugar production pegged at 1.28m tonnes, up 11.3% year on year,
and an "improved" beginning-of-season performance in Spain.
In China, cost cuts and capacity closures mean ABF's
operations in the country should "deliver a substantial improvement in
profitability this year".
And the company also revealed, another, strong performance by
its Primark discount clothes retailer, which achieved a 14% rise in sales.
"The second half of the period was characterised by
excellent Christmas trading, with very strong like-for-like growth," ABF said.
However, its shares, which hit a record high in the last
session, fell back 4.3% to 2580p in London, as the weak sugar performance
Numis, terming the sugar performance as "bad news", cut to "sell"
from "hold" its rating on ABF shares.
"ABF shares look to have run ahead too fast and too far,"
Numis analyst Charles Pick said.
Panmure Gordon, contrasting a "disappointing" sugar result with
an "impressive" performance by Primark, said that "the shares are surely due a
pause for breath".
The broker cut by £50m to £295m its forecast for ABF sugar earnings
before interest, tax and amortisation (ebita) for the full financial year,
which would represent a 32% fall year on year.
"Chinese [sugar] losses are still expected to be lower than
last year, but given weak world prices we now think the improvement will be
more modest," Panmure Gordon analyst Graham Jones said.
However, Credit Suisse, while keeping a "neutral" rating on the stock raised by 150p to 2400p its target price for the shares, saying that the boost from Primark outweighed the "negative inevitability" from sugar.