One-off charges hammer ABF's bottom line

Associated British Foods posted a big drop in first half earnings as the company's bottom line was hammered by one-off costs, but said full-year profits were still expected to be in line with the prior year's result.

For the 24 weeks ending on 2 March, the food ingredients manufacturer and retailer reported a 15% drop in statutory profits before tax to £515m, for a 19% decline in basic earnings per share to 49.2p.

Dragging on the company's bottom line were a non-cash impairment charge worth £65m on the assets of its largest private label bread manufacturing contract at its Grocery unit, which was served a notice of termination, and a £14m top up of its defined benefit pensions for members that subscribed between 1990 and 1997.

At actual exchange rates, total group revenue for the half edged up by 1% to £7,532m, with adjusted operating profits off by 1% to £639m and adjusted profits before tax in line with the year earlier figure at £627m.

The company had already guided towards lower operating profits in late February, as a result of expected weakness in its Sugar and Agriculture units, which more than offset progress at its Retail and Ingredient arms.

Wednesday's results confirmed those forecasts, with profits at its Agriculture arm down by 38% at actual exchange rates to £15m, while in Sugar they reduced from £106m to £1m.

The company blamed lower EU contracted sugar prices, which impacted its UK and Spanish units, together with a poor crop in China and later phasing of profit in Illovo this financial year for the fall in the latter.

Operating profits at the Ingredients arm on the other hand rose by 2% to £64m and in Retail by 25% to £426m.

At Grocery meanwhile, operating profits rose by 2% at constant FX to £167m, despite a £12m one time charge at for the closure of its Twinnings tea factory at Qingjao, China.

Within that same unit, ABF indicated that low bread prices and strong competition were a feature of the trading environment for its Allied Bakeries unit.

The company's cash flow improved considerably, so that even after £47m paid to acquire a business and paying a final dividend, the net cash balance came in at £386m, which marked an improvement on the £123m seen at the same time last year and the £614m it had on hand at the start of the financial year.

Looking out to the second half of the financial year, management said underlying growth at Grocery was expected to continue while at Primark a stronger US dollar was still expected to weigh on its margins.

The Board declared an interim dividend of 12.05p for an increase of 3% on a year ago, payable on 5 July.

To take note of, in the run up to the firm's six-month figures, analysts at Numis expressed concern about the increasingly competitive environment faced by Primark.

On the other side of the argument, on the back of the latest set of numbers for the company, Darren Shirley and Clive Black at ShoreCap reiterated their 'buy' recommendation for the company's shares, estimating a Primark price-to-earnings multiple of roughly 17.5, which they labeled "attractive".