Following this morning’s (23 February) mixed trading update from Associated British Foods, analysts have warned that issues in the company’s grocery division would likely weigh on the group’s first-half performance.
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While ABF reported a strong showing from its Pathmark and sugar divisions, these gains were more than offset by the poor performance of its international grocery business. ABF said it expects a “slightly lower” adjusted operating profit for the six months ending 28 February.
ABF, whose brands include Kingsmill and Ryvita, said that its North American edible oils business ACH was particularly hit by a “substantial margin reduction” due to fluctuations in commodity costs.
“All the shortfall comes in the grocery division, and in particular the ACH edible oils business,” Credit Suisse analysts Charlie Mills, Alex Molloy and Cyrus Azarmgin wrote in an investor note.
“Taking the long position in corn oil futures at the top of the market has probably cost GBP20m plus, with profits described as being substantially lower in H1,” the analysts noted.
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By GlobalDataMeanwhile, the company’s Australian bread, premium tea and branded sugar businesses took a battering as consumers traded down to cheaper alternatives, Cazenove analysts warned.
“Grocery is being negatively impacted by economic slowdown (eg Twinings premium teas), trading down from brands to cheaper private label (eg Australian bakery), price competition (eg Silver Spoon), and price movements in commodities (eg ACH),” the analysts observed in a research note.
Nevertheless, British Sugar, ABF’s sugar unit, performed strongly.
“While 1H profit will up year-on-year, this was driven by an excellent campaign, lower energy costs, firmer pricing and helped by euro strength against sterling at British Sugar offset by a disappointing crop, lower sugar extraction, and weaker pricing in China (which is likely to result in its Chinese business making a loss),” Cazenove said.
In addition, Panmure Gordon analysts pointed to the company’s strong balance sheet and move to raise US$600m through a private placement with UK and US institutional lenders as cause for optimism.
“ABF is not immune to the economic climate, but is certainly resilient and its strong balance sheet means it is well placed to take advantages of opportunities that may arise,” Panmure said.
Panmure hinted that ABF could be preparing itself to pursue acquisition opportunities.
“ABF’s balance sheet remains strong and it is placing US$600m of senior notes giving it more flexibility to react to any opportunities that may arise from the current economic climate,” Panmure researchers suggested.
ABF will announce its interim results on 21 April.
