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ABF hurt as sugar prices tumble to multi-year lows

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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 margins'

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 expected".

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.

Broker reaction

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 deterred investors.

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.


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