AB Foods upgrades earnings guidance but shares fall on pension deficit alarm

Associated British Foods said it expected full year earnings to be slightly ahead of last year's, although like-for-sales at Primark are expected to have deteriorated and news of a sizeable pension deficit set off alarm bells with investors.

A previous small pension surplus has in recent weeks morphed into a £200m pension deficit after the marked decline in UK long-term bond yields post the Brexit vote, which the company said would result in an increased service cost and a higher interest charge next year.

Apart from this scare, the 53 weeks to 17 September were mostly rosy for AB Foods, which also announced the sale of its cane sugar business in southern China for an unnamed amount.

Operating profits will now be ahead of last year after exceeding management expectations in the second half of the year, helping alongside lift earnings per share "marginally" ahead of last year.

Until July, the FTSE 100 company had warned that earnings would fall this year, though in a July trading update it said this was no longer the case.

Like-for-like sales at fast-fashion retail arm Primark are expected to be down 2%, decelerating from the 1% decline in the first half of the year.

Total sales were improved, however, thanks to a surge in the second half leading to a net 1.2m sq ft of new retail space opened during the year, lifting total sales 9% if currency changes are ignored, up from 7% in its July update. Sterling's weakness during the summer took the reported rise to 11% - though operating margins will be adversely affected in the new financial year.

The second half saw 16 store openings, while the four stores in northeast USA saw the Primark brand "well received with very positive customer feedback, particularly for its exceptional value for money and the breadth of its product range" ahead of four more openings in the coming year as part of group-wide plans for 1.3m sq ft of new space.

Ingredients was another exceptional performer in the year, with revenues are expected to be ahead of last year and operating profit again "substantially" ahead thanks to a significant profit recovery from the AB Mauri bakery ingredients and yeast business in all regions, and notably the US.

The larger sugar business is expected to see growth in both underlying revenue and adjusted operating profit at actual and constant currency, thanks to a strengthening in world prices and substantial cost cuts.

Due to forward-contract pricing, British Sugar will not see a benefit until the coming year, but profits will be in line with last year after June's buyout of the minority interests in Illovo Sugar.

With revenues marginally higher, grocery operating profit at constant currency will be higher than last year with a further improvement in margin and benefit from favourable currency translation.

Agriculture's adjusted operating profit is expected to be just below last year as good results from the specialist businesses and a strong finish for Frontier Agriculture were not enough to offset lower UK feed profits.

Analyst Henry Croft at Accendo Markets said on the surface while it looked like a positive trading update the sharp share price fall showed the market's feelings about the pension deficit and, "even worse", the decline in sales at Primark.

"This puts the less exciting part of the business back in focus and income seekers considering the company’s shares as a bond proxy of sorts may now have to rely upon food rather than clothing," Croft added. "A mid-September heatwave could even make things worse for Primark delaying the start of the all-important Autumn/Winter season and those big ticket purchases. Is the food/ingredients side of the business enough keep the shares in fashion?"

Darren Shirley at broker Shore Capital said he expected to leave his forecasts broadly unchanged, looking for pre-tax profit of £1,052m up from £1,024m last year and 104p earnings per share from 102p last time.

ABF shares were down 6.5% to 2,950p, though this is still higher than they were before the Brexit vote.