ABF plans sugar expansion despite dent in profits

By Anthony Fletcher

- Last updated on GMT

Related tags: British sugar, Associated british foods, United kingdom

Associated British Foods (ABF), owner of British Sugar, has
reported a first-half profit fall of 13 per cent and warned that
earnings would likely be affected by continued difficulties in the
sugar sector.

However the company, which announced its interim results for the 24 weeks ended 4 March 2006 today, reaffirmed its commitment to expand its sugar operations.

"This period has been an eventful one for the group,"​ said the chairman Martin Adamson in his statement.

"Imbalances in supply and demand within the EU sugar market and changes in producer behaviour in anticipation of the new regime resulted in price pressure and much lower profit for British Sugar."

The EU Commission published final proposals for sugar regime reform in November, which define the shape of the sugar market from 2009. The changes are aimed at reducing processing capacity within the EU, eliminating subsidised exports and reducing sugar prices.

This means that producers in Least Developed Countries (LDCs) will be able to sell sugar without quota or tariff into the EU.

"British Sugar has always recognised the need for reform and expects, as a highly efficient producer, to have a strong and profitable position within the EU sugar market,"​ said Adamson.

"However, the changes and continued imbalances in supply and demand can be expected to affect the profit of British Sugar during the transition period."

The company said that it nonetheless plans to continue investing for future growth, with the opening of a new factory in Western China and other capacity increases at many locations.

The company is also in the midst of preparing a formal offer for a controlling stake in Illovo Sugar, the largest producer in Africa. According to FT.com, ABF, which is being advised by NM Rothschild, recently submitted a cash proposal to the Johannesburg-listed company estimated to be worth about 300m.

"British Sugar has a long experience of operations outside the UK, first in Poland and then in China. A partnership between British Sugar and Illovo would enable the transfer of its expertise to support the development of Illovos low cost production in Southern Africa and British Sugar would become Illovos route to market when exports have unrestricted access to the EU from 2009.

"We are committed to our investment in British Sugar, a profitable and highly efficient producer, and the addition of Illovo would strengthen this position."

Elsewhere, the company preformed better. The Primark clothing chain again produced strong results despite a devastating fire at its main UK warehouse and there was good progress at AB Mauri, the recently acquired bakery ingredients business.

The solid progress of AB Mauri reflected the benefit of volume increases and improved pricing for yeast and a very satisfactory growth in bakery ingredients.

"In our grocery businesses, there was good organic growth in hot beverages, Ryvita and our Mexican oils business. However, profit growth was held back by lower UK bakery volumes and the final commissioning costs of the new Sydney bakery."

Overall, adjusted profit before tax was down 2 per cent to 255m, while basic earnings per share was down 16 per cent to 21.0p and profit before tax down 13 per cent to 234m.

The company's chief executive however was keen to accentuate the positive. The resilience of the group's operations has produced good results despite tough trading conditions in some markets and sharply higher energy costs,"​ said George Weston.

"Primark continues to perform strongly and will benefit from the heavy investment now being made in its expansion, while our hot beverages and international yeast businesses are also doing well.

"As expected, British Sugar has experienced price pressure but it is well positioned for the medium term and we remain confident about its prospects."

Related topics: Market Trends

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