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Shares soar in ABF, as it unveils list of Brexit bonuses

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Shares in Associated British Foods soared as the tea-to-clothing group unveiled forecast-beating profits and hailed the potential benefit from a range of political upheavals, including Brexit, to its prospects.

Shares in the UK-based group, which employs 130,000 people in 50 countries, soared 9.2% at one stage to 2718p in London, adding some $2.5bn to its market value.

The surge followed the release of results which, in showing earnings up 59% at £821m for the year to September 17, equivalent to 106.2p per share, beat market expectations.

Revenue growth of 4.7% to £13.40bn was driven by an 11% surge in takings at Primark, the discount clothing retailer, helped by new store openings.

Operating profits growth was biggest in the ingredients division, at 22%, boosted by margin improvement helped by lower costs of raw materials, including some agricultural commodities.

Sterling effect

And ABF forecast further "progress" in profits in its current financial year, helped, overall, by weakness in sterling, which has plunged to its lowest levels since the 1980s against the dollar since the UK voted in June to quit the European Union.

"Assuming a continuation of current exchange rates… we expect group earnings to benefit from the translation of overseas profits," said Charles Sinclair, the ABF chairman, while highlighting that depreciation in the pound was not all good news for profits.

"As Primark buys much of its merchandise in dollars and sells in the UK in sterling, there will be an adverse effect, in the year, on its UK margins."

Trade, red tape bonus?

Still, the group also highlighted the potential boost to UK food output from weaker sterling, in terms of making imports less competitive – so creating opportunities for the country to boost self-sufficiency in bought-in goods – besides the boost to export potential.

"The current level of sterling offers UK food producers significant opportunities to replace imported food and build export markets," said George Weston, the ABF chief executive.

He also flagged the potential boost to ABF prospects too from fresh trade deals, and a reduction in red tape, as the UK exercises its freedom from leaving the EU.

"Changes in legislation and trade agreements, particularly in the areas of trade tariffs and UK agricultural policy have the potential to benefit the group," Mr Weston said.

He added that ABF was "engaging with a number of UK government departments" to ensure that the group's interest were "recognised" during the Brexit reforms.

Sugar liberalisation

A further boost to the group would come - even while the UK is still inside the EU, which it is not expected to leave until 2019 – from next year's liberalisation of the bloc's sugar policy.

"The end of the EU sugar regime in October 2017 represents an opportunity for British Sugar to increase its sugar production and it is working with growers to restore beet supplies to more normal levels in 2017-18," from the depleted levels of less than 1m tonnes recorded in 2015-16.

Next year's harvest "is the first crop for which growers will be able to choose between one- and three-year deals [for producing beet for British Sugar], both of which will have bonuses linked to the sugar sales price.

"This is designed to strengthen the partnership with our farmers and underpin British Sugar's competitive position."

'Only practical next step'

Meanwhile, the group's Vivergo Fuels bioethanol plant, in the north of England, stands to benefit should the UK raise the mandated level of ethanol to be included in transport fuel, as recommended by a parliamentary committee.

"The UK Energy & Climate Change Select Committee recently issued a report recommending a proposal to increase the bioethanol inclusion in road fuel from the current level of 5% to 10%," Mr Weston said.

"We believe this is the only practical next step towards achieving the UK Government's previously agreed 2020 renewable obligation for transport fuel in the near term," besides bringing the UK regime into line with that in the US, Brazil, France and Germany.

ABF said that Vivergo, which has been plagued by teething troubles, had made "good progress" in raising its output, but "achieving operational reliability remained challenging".

The fate of Vivergo plant, and the rival Ensus operation owned by Germany's CropEnergies, are viewed as having large potential to effect UK grain prices, given their potential for swallowing 1m tonnes apiece a year, equivalent to roughly 15% of the country's average wheat harvest.

By Mike Verdin

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