Associated British Foods hit by rival s profit warning

Food and fashion company Associated British Foods (ABF) saw its shares drop yesterday (8^thApril) on the back of a profit warning from German rival Südzucker.

Sugar maker Südzucker announced that it expects a decline in revenue and earnings for the year, due to increasingly challenging conditions in the European sugar and bioethanol markets.

That news sent the German company’s shares down some 20% yesterday, and the pain was generously spread to fellow sugar maker, UK-based ABF, which declined around 4%.

Will the hit to ABF’s sugar business be bigger-than-expected?

Shares of the owner of the Silver Spoon brand have remained under pressure today – down around 1% at time of writing.

Now, these concerns are not without basis. ABF itself highlighted the difficult sugar environment during its trading update in February (during which time its shares also suffered).

Importantly, the company’s sugar division is a sizeable part of the overall business, accounting for around 20% of total fiscal 2013 revenue and a healthy 37% of total operating profit.

The company, however, reiterated its full-year guidance in February, expecting earnings per share for the year to be similar to that of the previous year.

ABF expects weakness in sugar to be offset by decent performance in its other business

To be specific, that’s down to the strong performance at Primark. Certainly, the company’s Grocery division (encompassing brands such as Twinings tea and Ovaltine) seems decent, but Primark has been a standout performer.

Indeed, the budget clothing chain has been growing fast over the last few years. That’s thanks to well-known and prevalent conditions that have seen shoppers turn to cheaper fashion alternatives, such as those offered by Primark.

For fiscal 2013, Primark took revenue of £4.3bn, a 22% increase over the previous year, accounting for 32% of total revenue. Operating profit at the business came in at £514m (around 43% of total), which was a 44% increase over the prior year.

And if the company’s guidance for that business, together with its expansion efforts (such as new Primark stores in France) is anything to go by, Primark’s strong growth is expected to continue.

ABF’s shares have certainly benefited from Primark’s strong run

The company’s stock had soared around 64%, over the last year, reaching a peak in February.

Although currently down some 14% since, its valuation is still a notable premium over peers in both the food and brick-and-mortar fashion retail sectors.

Of course, concerns over its sugar business will no doubt persist for now and further bad news could well be on the horizon – all of which look set to keep a dent on the company.

Further impressive performance at Primark, however, should provide a boost – despite the pricey valuation.