Increased profit at British Sugar to contribute to strong first half for Associated British Foods
Higher global sugar prices will contribute to a robust increase in first-half profits at Associated British Foods, the group said today.
But it warned that margins in its Primark budget fashion retail chain would be reduced due to the impact of the fall in the value of the pound.
ABF said UK like-for-like sales at Primark in the six months to March are expected to rise 2%, but to come in flat across the board.
Total sales at Primark are forecast to increase 11% at constant currency, driven by more retail space, and 21% ahead at actual exchange rates.
But ABF said in a trading update margins will take a hit from the fall in the value of sterling. It said: 'As forecast, the operating profit margin in the first half will decline, mainly reflecting the strength of the US dollar on input costs.
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'The full effect of sterling weakness against the US dollar on Primark's purchases will result in a greater margin decline in the second half because our currency hedges were at more advantageous exchange rates in the first half.'
Sterling has fallen 16% versus the US dollar since the EU referendum and 10% against the euro, driving up the cost of imports for British firms.
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ABF said it is pressing ahead with domestic and international expansion at the budget retailer, with stores in Uxbridge, Belgium, Spain and the US slated to open over the next three months.
The group said that overall revenue across its sugar business, which includes operations in the UK, Spain, China and Africa, would be 'well ahead of last year', largely as a result of higher sugar prices and increased production in Africa, while further benefits from the division's performance improvement programme would deliver 'a substantial increase in profits'.
'With 2016-17 forecast to be the second year of global sugar deficit, world prices are higher than last year,' it said. 'A tightening of EU stock levels has strengthened domestic prices across the region. Domestic and regional prices increased in Africa as a result of higher US dollar denominated world prices.'
ABF said that, with a smaller UK beet crop and marginally lower years, production at British Sugar, which has beet sugar factories in Norfolk, Suffolk and Nottinghamshire, was projected to come in at just under 900,000 tonnes.
However, it added: 'With sales fully contracted for the year, firmer prices have been confirmed which, combined with lower beet costs and a weaker sterling/euro exchange rate, will drive substantial improvement in British Sugar's operating profit.'
ABF, which also owns Twinings tea and Kingsmill bread, said in a pre-closed statement ahead of its first half results that it expects 'excellent progress' in group profits over the period and its outlook for the full year is unchanged.
In November, chief executive George Weston said the pound's fall will bring 'benefits and challenges' to the group. ABF is hoping for a boost to the value of overseas group earnings, which account for around half of the group's total.