Lower cotton prices help ABF shares to record high

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Shares in Associated British Foods jumped to a record high after the retail-to-feed group unveiled profits well ahead of market expectations, boosted by factors including lower cotton prices and record Zambian sugar output.

ABF reported underlying operating profits of £496m for the half year to March 2, up 20% year on year and beating the £485m result expected by analysts.

The improvement was led by the Primark discount clothing division, which saw operating profits soar 55% to £238m, overtaking the historic sugar division as the group’s biggest earner.

Primark’s growth reflected both higher sales and stronger margins, which reflected “the benefit of lower cotton prices”, ABF said.

Cotton prices in New York, while they have rebounded this year, remain below year-ago levels, and at one-third of the 2011 record highs which squeezed Primark margins.

‘Another good performance’

However, the group also unveiled a 25% jump in profits at its agriculture division, spurred by demand for the feed manufactured as a byproduct of sugar beet processing.

UK feed requirements have been boosted by the wet and cold weather which has delayed the turnout of animals to pasture, and is evident in a 10% slump in milk production in the fortnight to April 6.

The Frontier grain trading business achieved “another good performance”, in a UK grains market which turned from a focus on exports to imports following last year’s dismal wheat harvest.

And ABF revealed a decline in sugar profits, of 5% to £163m, which was not as steep as many analysts had expected, given the “much lower prices” in China, which prompted the group to mothball two processing sites, and take a charge of £22m against their value.

The decline in China was offset by better cane volumes and sugar yields at the southern African Illovo business, which raised output of the sweetener by 14.4% to 1.75m tonnes in the season which ended last month.

Sugar hiccups

ABF remained cautious over its sugar profits for the full year, to September, warning of losses in China and lower volumes in its core European operations, where a poor beef harvest is expected to limit UK sugar output to 1.15m tonnes this year, down 12.9% year on year.

In Spain, delayed plantings in the south, and a delay to harvest in the north caused by heavy rains, will limit output of beet sugar to 393,000 tonnes, down 16.0% year on year.

However, foreseeing further “strong profit growth” at Primark, Charles Sinclair, the ABF chairman, said that the group was expecting “good progress” in the full financial year.

Market reaction

The results were viewed as “outstanding” by Shore Capital analyst Darren Shirley, flagging the better-than-expected performance in sugar besides the “very strong” growth in Primark.

In sugar, “we believe there is scope to nudge forecasts upwards if current momentum is maintained though we expect to stay where we are for now at £418m” in divisional operating profits for the full year, Mr Shirley said, if keeping at “hold” his rating on ABF shares.

Panmure Gordon analyst Graham Jones, who called the results “excellent”, also stuck by a “hold” rating, although while lifting his target price for the shares by 50p to 1800p.

While acknowledging that sugar profits had fallen less than expected at the half year stage, Mr Jones said “we believe this largely reflects an earlier phasing of sales in the UK and Spain, and we are not changing our £433m forecast for the full-year”.

Credit Suisse, sticking by a “neutral” rating on ABF shares, with an 1850p price target, said: “Sugar was better than we had with what looks a very strong showing at Illovo more than offsetting the estimated £20m reverse in China.”

The shares jumped to an all-time high of 1963p in early deals in London, before easing back to 1947p in lunchtime trade, a gain of 5.2% on the day.

Source: AgriMoney

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