ABF earnings soured by sugar business

Associated British Foods' pre-tax profits have fallen in a bittersweet set of first-half earnings, as continued weakness in its sugar operation offset sales growth at its Primark discount fashion chain.

Shares in the UK food and retail conglomerate fell 4 per cent after it said that pre-tax profit halved in the 24 weeks ended February 28 to £124m, down from £334m in the first half of last year. Underlying operating profit was £474m, slipping 2 per cent from £497m.

Total revenues were £6.25bn, up from £5.21bn. Like-for-like sales at Primark branches, the engine room of the group's earnings, were level over the year, but revenues were up 15 per cent at constant currency rates from £2.28bn in 2014 to £2.55bn thanks to an 11 per cent rise in retail selling space. ABF chief executive George Weston said plans to expand into the north-eastern US states were under way.

"This is a sound trading result with significant progress made in operating profit by Primark, agriculture and ingredients, and further improvement in Grocery's margin," he added.

However, the group's overall performance was held back by a sharp drop in sugar profits due to what it termed "substantially lower EU sugar prices". It also edged down its full-year earnings guidance on foreign currency concerns.

Underlying earnings per share for the first half of the year rose 1 per cent to 46.1p. But ABF said that with the British pound's continuing strength against most of its major trading currencies, and the transactional impact of euro weakness on the results of Primark and British Sugar, it expected a modest decline in adjusted full-year EPS in the second half of the year.

ABF, which processes all the sugar beet in the UK, has been hard hit by the drop in EU sugar prices, forcing it to restructure its sugar business. This has included the closure of two factories in China and a biofuels plant in England at a loss of £128m.

As recently as 2012, the AB Sugar business made earnings before interest and tax of £510m, but profits have plunged since as businesses prepare for a 2017 reform to the EU sugar regime, which will lift sugar production quotas, eliminating the guaranteed price for sugar beet farmers and abolishing export limits.

ABF said on Tuesday that its AB Sugar business continued to weigh on the group's profits. The unit made an operating loss of £3m but a small profit is expected for the full year, according to a statement from the company.

The news came as sugar rival Tate & Lyle said it would exit its business selling syrups and starches to foodmakers in Europe, as the ongoing volatility of the sector threatens its profits.

Despite UK economic growth and rising disposable incomes, stiff competition between supermarkets for consumers' wallets also weighed on margins in the group's bakery business.

Given the divergence between ABF's food and retail businesses, there remains speculation among analysts of a possible initial public offering of the Primark business once it makes its branded goods available online.

ABF shares have fallen 13 per cent since the start of this year. They were down by 3.5 per cent at 2,764p during early London trading.

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