'Unsustainably low' sugar prices sour ABF hopes

Associated British Foods revealed further setbacks to its sugar division from poor weather in Spain and lowered expectations for improvement in China, but the hiccups were offset an "excellent" performance in retail clothing.

The groceries-to-grain trading giant said that revenues and profits from sugar for the six months to March 1 would come in "substantially lower" than those a year before.

While Associated British Foods had last month cautioned that its sugar revenues had started the financial year with a slide of 28%, the comments prompted some brokers to cut further their forecast for the group's profits from the sweetener.

At Panmure Gordon, Graham Jones cut by £20m to £275m his forecast for the division's earnings before interest, tax and amortisation (ebita) for the full financial year, a 37% decline on the 2013 result

For 2015, ebita will fall further, to £220m, reflecting existing setbacks and the prospect of a rise in contracted costs for UK sugar beet, of which it processes the whole crop, Mr Jones said.

'Excellent performance'

ABF flagged better performance by its Primark clothes retail division, which has put in "another excellent performance", and is expected to show a 13% rise in sales for the half year.

New store openings, in Australia, Germany, the Netherlands, Portugal and Spain as well as in the home UK market, added to like-for-like sales growth of 4%.

The group stuck by a forecast of achieving full-year earnings per share for the current financial year "similar" to that reported for the year to September 2013.

Market reaction

However, ABF shares, while hitting a record high of 3012p in early deals in London, fell back to 2909p in late morning trade, down 2.8% on the day.

Panmure Gordon kept a "hold" rating on the stock, if increasing its target price for the shares to 2760p from 2500p thanks to Primark's performance.

But at Numis, Charles Pick, flagging "severe pressure" in sugar, cut his rating to "sell" from "reduce", with a target price of 2240p.

Mr Pick said that a dent to the sugar division from lower prices, until late, "will impact more in the second half" of the financial year, while estimating, on the retail side, that the group was already trading on a higher multiple of operating profits than H&M and Inditex, a "demanding" valuation.

'Unsustainably low sugar prices'

ABF noted in sugar that the world sugar price has "fallen to what we believe to be an unsustainably low level", putting "further pressure on industry revenues and margins".

In futures markets, sugar prices have actually shown a sharp appreciation this month thanks to concerns over dry weather in Brazil's key Centre South cane producing region.

Raw sugar futures for May delivery touched 17.48 cents a pound on Monday, up 10.9% so far for February, with London white sugar futures for May hit $473.50 a tonne, a gain of 10.1% for the month.

However, cash market prices remain constrained by ideas of ample world supplies, with 2013-14 the fourth successive season when production has exceeded supply.

The European market has gained extra pressure from the prospect of the removal of production quotas, implying more choice for buyers, and less pricing power for sellers.

In southern Africa, where ABF controls Illovo Sugar, the group cautioned that "competition from low cost imports" has undermined prices in Tanzania and South Africa.

'Challenging harvest conditions'

But ABF also warned that a good start to the beet campaign in Spain had been followed by "adverse weather", causing "challenging harvest conditions".

"Sugar production volumes are expected to be lower than last year," ABF said.

In China, the group, which last month forecast a "substantial improvement" in profits this financial year, on Monday sounded a more cautious note in saying that there had been a "net improvement in performance".

"Production in the north has been seriously reduced by flooding in Heilongjiang and, with fewer factories in operation following last year's rationalisation, volumes are expected to be much lower year-on-year," ABF said.

However, "the campaigns at Qianqi and Zhangbei were both excellent with good factory throughput and higher sugar content in the beet".

* The group made no mention of the complaint made to UK fair-trade officials by Napier Brown, a major customer the owner of the Whitworths brand, that ABF has been "abusing its dominant position" in sugar pricing.

Napier Brown, the UK's largest sugar reseller, accused ABF's British Sugar division of "serious anti-competitive and abusive pricing behaviour".

Shares in Napier Brown's parent group, Real Good Food Company. stood up 4.3% at 49.5p, having plunged 25% on Friday after the dispute was announced.

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