By James Davey
LONDON, Sept 8 (Reuters) – Falling sugar prices are set to hold back earnings growth at Associated British Foods in the next two years, offsetting continued strong performance at the group’s Primark discount fashion chain.
On Monday AB Foods maintained its guidance for its financial year to Sept. 13, forecasting adjusted earnings per share ahead of the 98.9 pence made in 2012-13.
It said the adverse effect of lower sugar prices and a previously flagged hit of 50 million pounds ($80.9 million) on the translation of overseas results arising from the strengthening of sterling would be offset by strong operating profit from Primark and its grocery business, as well as an improvement at its ingredients operation.
Shares in AB Foods, 55 percent owned by the Weston family, have soared 59 percent over the past year, mainly on the back of Primark’s success.
However, they fell up to 5 percent on Monday after the group cautioned that the world sugar price continues to be unsustainably low at an average of 17 cents per pound, well below the global average cost of production.
European sugar prices have also been driven down by competition among producers positioning for growth in new markets ahead of the removal of quotas in 2017.
“We saw a big decline in full-year 2013-14 (sugar revenue and profit); we’re going to see a further decline in full-year 2014-15,” AB Foods Finance Director John Bason told Reuters.
The sugar division made adjusted operating profit of 435 million pounds in 2012-13. Analysts at Jefferies forecast the figure more than halving to about 200 million pounds for 2013-14 and a decline to about 140 million pounds in 2014-15. They have a “hold” rating on the stock.
The group said that Primark’s full-year sales are expected to be 17 percent higher than the previous year at constant currency rates and 16 percent ahead at actual exchange rates.
That growth has been driven by a net increase in retail selling space of 1.2 million square feet, an estimated 4.5 percent rise in sales at stores open at least a year and higher sales densities in new stores. The full-year operating profit margin is forecast to be slightly higher than the previous year.
By contrast, Marks & Spencer, Britain’s biggest clothing retailer by annual sales, has posted 12 straight quarters of declining sales in its general merchandise division.
Primark now trades from 278 stores in nine European countries and said it is on track with previously announced plans to enter the United States market towards the end of 2015.
“The way things are going, M&S is soon going to be overtaken by Primark, with Primark set to make over 600 million pounds operating profit on sales of 5 billion pounds in the year about to finish,” independent retail analyst Nick Bubb said.
AB Foods forecast “good growth” in full-year operating profit at its grocery division, which includes Kingsmill bread and Twinings tea, and that revenue from the ingredients business would be ahead of last year on a constant-currency basis.
Shares in AB Foods were down 128 pence at 27.82 pounds at 0906 GMT, valuing the business at about 22 billion pounds. ($1 = 0.6183 British Pounds)