‘Challenging’ sugar pricing talks mar ABF growth

(AgriMoney) – Shares in Associated British Foods eased after the retail-to-grain trading group marred an upbeat profits result by cautioning over “challenging” talks with customers over fresh sugar supply contracts.

The UK-based group, whose portfolio ranges from Twinings Tea to the AB Vista livestock feed business, said that its operating profits for the second half of its financial year, which ends on Saturday, “will be ahead of expectations”.

The performance reflects resilient margins at Primark, the discount clothes retailer, thanks to a 22% jump in sales and “the benefit of lower cotton prices”, said ABF, which flagged a lower interest expense and UK tax rate too.

“Adjusted earnings per share for the full year will show good progress,” the group said.

‘Proving challenging’

However, ABF shares closed down 1.8% at 1818p in London as investors latched on to a caution that talks with its European Union sugar customers, many of whom renegotiate supply deals on an annual basis, “are proving challenging”.

The group, which produces sugar in Spain and the UK, besides in China and southern Africa, flagged an “increasingly negative sentiment” in the European market driven by rising availability of sugar.

The European Commission has, through measures allowing in extra imports at tariff rates, boosted sugar supplies in the bloc’s highly-regulated market, with low world prices of the sweetener also taking buyers’ notice, ABF said.

Sugar price gap

The comments were termed “decidedly cautious” by Numis, and spurred rival broker Panmure Gordon, ABF’s joint house broker, to trim its target price for ABF shares by 25p to 2075p, while keeping a “buy” rating.

Panmure Gordon, citing “weaker pricing environment in EU sugar”, cut its forecast for earnings before interest, taxation, and amortisation (ebita) at ABF’s sugar division by £55m to £345m for the financial year which starts on Sunday.

Panmure Gordon analyst Graham Jones flagged the gap between the import price of sugar to the European Union, under the benchmark CXL trade programme, of some E570 per tonne, compared with a market price in the region of more than E700 a tonne.

“We had expected this price gap to close over a number of years, but it now appears that the gap will be substantially closed this year,” Mr Jones said.

Kingsmill vs Hovis

ABF also reported “strong earnings from grain trading” at its UK-based Frontier joint venture with Cargill, with the tie-up “performing well” despite the country’s poor grains harvest last year.

Frontier had been able to exploit, besides grain price volatility, a higher volume of UK wheat imports which “increased the complexity and cost of the UK cereal supply chain”.

The group also revealed that, helped by a new contract with the Co-op supermarket chain, its Kingsmill bread brand had overtaken Premier Foods’ Hovis to become the UK’s second-ranked bread label.