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ABF sugar operations struggle as retail thrives

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Investors increased estimates for the drop in Associated British Foods' sugar results after the group confirmed production setbacks in Spain and the UK, and a dent to its Chinese operations from lower prices.

Associated British Foods' trading statement for the first quarter of its financial year was, overall, well received by investors, in including a 25% leap in sales at its Primark clothes retail operations, where margins were also higher thanks to "lower cotton prices".

The group, whose empire stretches from Twinings tea to the UK's Frontier Agriculture grain trading joint venture with Cargill, said that its group performance for the 16 weeks to January 5 had been "ahead of expectations", and said it was now expecting a rise in operating profits for the full year to September.

ABF shares jumped to a record high of 1676p in London, before easing to close at 1606p, a gain of 3.2% on the day.

UK setbacks

However, the rise in group profit expectations defied some deterioration in prospects in sugar, including in the key UK operations, set for a drop in full-year profits "as a consequence of the lower production, higher beet costs and a weaker euro".

The UK had seen lower beet yields, and a drop in sugar content in the crop, thanks to poor weather which brought the UK its wettest summer in a century last year, with England suffering its wettest year on record.

"As a consequence the UK campaign started later and will have lower factory throughputs to allow for a slower filtration process," said ABF, which processes the entire UK beet crop, and estimated its sugar output in the country at 1.13m tonnes, a 14.4% drop year on year.

The lower UK beet yields were also set to constrain volumes of beet-based feed, as sold by ABF's agriculture division.

Extra cane use

Profits in Spain will be lower too, after heavy rains, which followed the 2011-12 drought, delayed plantings in the south of the country, and are "expected to reduce the size of the crop".

While ABF said it expected its sugar output to hit quota levels, profits would be hit by higher beet costs resulting from a lower harvest, and by use of a higher proportion of cane as a raw material, which offers the operations lower margins.

In China, profits will be "well below" last year's levels, thanks to "much lower" sugar prices following the country's strong beet and cane harvests, which were boosted by higher plantings and yields.

South Africa-based Illovo Sugar remained the one major sugar operation set for higher profits, boosted by higher can yields and sugar content in South Africa, and an "extended campaign" in Zambia.

Broker reaction

The data prompted Panmure Gordon analyst Graham Jones to cut by £10m to £445m his estimate for ABF's sugar operating profits in the current financial year, "with China pricing looking quite difficult at the moment".

However, the broker hiked to 1670p, from 1450p, its target price for ABF shares, which it said "should be a core holding in the sector".

Shore Capital, while restating a "buy" rating in ABF stock, flagged the "more mellow news from sugar", and cut its estimate for sugar operating profits to £440m.

In the year to September 2012, ABF's sugar operating profits reached £510m.


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