Sugar sales and weak pound sweeten revenues at Associated British Foods
Revenue growth at Associated British Foods (ABF) has been sweetened by the retail giant's sugar business and a weakened pound has created favourable trading conditions across the board.
The figures
Group revenue at the Twinings Tea, Ovaltine and Primark owner was up one per cent year-on-year in the 40 weeks to June 18, the company said in a trading update today.
In the third quarter, revenues were up seven per cent. This was aided by weaker Sterling compared to the company's other major trading currencies compared to the same period in 2015.
Boosted underlying operating performance "ahead of expectation" was driven by an improved sugar business. On 28 June, ABF completed its buyout of South African sugar producer Illovo.
UK sugar production for the 2015/16 year was just short of one million tonnes.
Sales at the cut-price retail chain Primark were up seven per cent on 2015, though bad weather and an unseasonably cold April hit sales before evening out in May.
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The operating profit margin in the third quarter was 11.9 per cent, in line with that of the first half, while 11 new stores opened in the UK, Portugal, France, Germany, the Netherlands, the US and the company's first branch in Italy.
By late morning trading ABF's share price was up almost nine per cent to 2,777p.
[stockChart code="ABF" date="2016-07-07 11:38"]
Why it's important
Currency woes hurt top line growth in the first half of this year, but has had the opposite effect in the third quarter.
"Following the result of the EU referendum, sterling has weakened further and at these rates we expect a bigger translation benefit in the final quarter with no material transactional effect," ABF said today.
As a result, the company's outlook has improved for the financial year and ABF no longer expects a decline in adjusted earnings per share for the group for the full year.
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This would translate to mixed results in a company-by-company breakdown of ABF's growth.
Continued Sterling weakness would have an "adverse transactional effect" on the profit margin of Primark's UK sales, which is currently half its turnover. However, it would aid British Sugar's margins and add to the group's profits outside the UK – which were around half of overall profits last year.
What ABF said
ABF said in a statement:
The UK referendum decision to leave the EU has created uncertainty in the business environment and financial markets. ABF is an international business with diverse interests across 48 countries and a business model that, wherever possible, aligns production with the end markets for its products.
Primark operates discrete supply chains for its stores in each of the UK, US and Eurozone. We undertake relatively little cross border trading between the UK and the rest of the EU.
What others said
AJ Bell investment director Russ Mould said:
"The outlook is looking sweeter for Associated British Foods following the fall in Sterling. Third quarter revenues were boosted by Sterling's weakness against most of the group's major trading currencies and a further fall since the EU referendum means ABF no longer expects a drop in adjusted earnings per share for the full year.
"Sales at Primark continue to rise in the third quarter and overall underlying operating performance was ahead of forecasts with an improvement in its sugar business."
In short
Sales were up in the third quarter and a weak pound will probably help in the fourth quarter, but it will be a mixed bag for individual companies in ABF's retail mix.