Disappointing year for ABF ingredients, note analysts

Analysts estimate that the ingredients division of Associated British Foods (ABF) is likely to have a tough second half in line with the “lacklustre” operating performance in the first six months.

ABF released a trading statement today ahead of its full-year results for the 52 weeks to 17 September 2011, which are scheduled to be announced on 8 November. Management reports that the group’s adjusted operating profit for the second half will be “in line with expectations.”

Graham Jones, analyst, Panmure Gordon, remarked that it has been a “disappointing” year for the ingredients side of ABF.

“Bakery ingredients saw strong sales growth, and at ABF Ingredients sales of feed, bakery and speciality enzymes made good progress, but yeast extract margins were squeezed by higher commissioning costs at Harbin and high molasses costs,” said the analyst.

He predicts that the division’s EBITA (earnings before interest, tax and amortisation) will fall from £104m to £67m (€78m), which is lower than the analyst’s previous forecast of £75m.

Yeast challenges

Indeed, ABF management, in its expectations for the full-year financial results, report the yeast and bakery ingredients business of AB Mauri maintained the revenue growth rate of the first half but flagged up that operating profit in the second half will be “sharply lower”.

The decline reflects under-recovery of high input costs in Europe, North America and China in yeast.

ABF said that the European yeast market has been extremely competitive and margins have suffered from an inability to recover fully raw material cost increases.

Management also notes that “some weakness in the bakery industry in North America led to lower sales of wet yeast and higher-margin technical bakery ingredients, and full recovery of higher input costs was consequently challenging.

But ABF said the performance of its ingredients division in Latin America was encouraging, where “significant” raw material cost pressure was offset by price increases.

Sweet year for sugar

The group reports that profit for the full year in its sugar production business will be “well ahead of last year, and better than expected.”

Graham Jones expects EBITA here to rise from £240m last year to £295m (versus a previous forecast of £273m), with growth driven, said the analyst, by strong performances in Spain and China.

In Spain, AB Sugar said beet output was strong at 410kt and cane processing volumes rose significantly to 248kt. In China, local prices rose substantially and beet volumes doubled to 210kt although unfavourable weather held back cane volumes to 415kt.

In the UK, notes management, output was weak due to the severe winter weather, and production of just below 1mt was supplemented by destocking, Spanish refining and buying in high priced sugar.

“Given the positive outlook for world and EU sugar prices for next year," Panmure Gordon said it has raised its 2012 EBITA forecast for AB Sugar from £370m to £400m.