ABF sugar profits tumble, with more weakness ahead

Associated British Foods warned of further challenges for its sugar division, after a 60% slump in profits, as it grapples with a shake-up of European Union laws which has also hurt rivals such as Suedzucker too.

The retail-to-grain trading conglomerate, while reporting a 4% rise to £468m in group pre-tax profits for the half year to March 1, said that operating profits in sugar plunged to £64m, saying the business had been "severely affected" by weak prices of the sweetener.

Sugar revenues fell 22% to £1.03bn.

"The impact in the European Union is exacerbated by an intensification of competition ahead of quota abolition in 2017," the group said, a reference to the lifting of regulations including production limits which is already having a large impact on the sector.

The prospect of more choice for supplies has been prompting buyers to shop around for better deals, with some observers cautioning over stronger competition from isoglucose, Europe's equivalent of North America's high fructose corn syrup.

Earlier this month, shares in Germany's Suedzucker, Europe's top sugar group, suffered their biggest ever one-day decline on a profit warning.

Lower EU sales volumes and prices "are expected to persist through the second half" of the group's financial year, ABF said.

'Heavily in surplus'

While viewing as "encouraging" a recent recovery in world sugar prices, boosted by drought in Brazil, he group forecast that profits in its sugar division in the second half would be "substantially lower than last year".

Besides the price setbacks, the group forecast an 18.6% drop to 330,000 tonnes in beet sugar production in Spain.

In China, the group cautioned of a "further deterioration in sugar prices as a high level of imports have left the market heavily in surplus".

Customs data on Wednesday showed China's sugar imports hitting 411,132 tonnes last month, double those a year before, and taking total buy-ins for 2014 so far to 863,563 tonnes, growth of 63%.

UK performance

In the UK, where ABF is based, the group nudged higher its forecast for sugar production to 1.32m tonnes, from 1.28m tonnes, the highest figure since the EU sugar regime was put in place eight years ago.

ABF cited a stronger-than-expected beet crop, saying that "favourable growing conditions through the mild winter in the UK resulted in the crop continuing to grow into the new calendar year, with good beet quality and high sugar content".

However, the group also signalled further setbacks at its Vivergo grain ethanol joint venture in northern England which, while overcoming operational teething problems, was facing a softened market

"Production volumes at the Vivergo bioethanol plant in Hull have increased steadily but profitability was adversely affected by lower ethanol prices," ABF said.

Feed takings down

The group unveiled lower results at its agriculture division too, with revenues down 2.5% at £625m and profits down £1m at £19m, although this was in part down to currency movements.

A drop in revenues from UK feed, supressed by a mild winter which reduced livestock farmers' reliance on bought-in fodder, was "partly offset" by growth in China.

However, ABF unveiled a sharp rise in profits-of 26% to £298m, at its Primark clothes retail arm, supporting group profits growth, and with the group announcing a roll-out of the chain into the US.

Market reaction

The group results were well received by analysts at Panmure Gordon, who raised to "buy" from "hold" their rating on ABF shares, and their target price on the stock to 3210p from 2760p.

"We think Primark's launch in the US will be successful, as it has been across a wide range of European economies," the broker said.

The shares stood 8.8% higher at 2961p in morning deals in London.

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