Allied Bakeries’ Co-op deal boosts ABF grocery results

By Mike Stones

- Last updated on GMT

Related tags Associated british foods

ABF's grocery division posted third quarter growth of 7%, thanks to Allied Bakeries' deal to supply 4,000 Co-op stores
ABF's grocery division posted third quarter growth of 7%, thanks to Allied Bakeries' deal to supply 4,000 Co-op stores
Allied Bakeries’ deal to supply bread to Co-op stores has helped the grocery division of its parent company Associated British Foods (ABF) achieve 7% growth in the third quarter of its financial year.

Grocery revenues for the 16 weeks to June 22 2013 were 7% ahead of the same period last year.

The contract to supply 4,000 stores started in April and “excellent service” ​had been maintained despite major revisions to delivery routes, claimed the company.

City analyst Panmure Gordon estimated the new business – won from Premier Foods – made Allied Bakeries the UK’s second largest bread supplier.

“We understand additional volume has also been secured, which will stretch its lead over Hovis further,” ​added the analyst’s executive director Graham Jones.

The company reported group revenue up 9% for the 40 weeks ended June 22 2013 and up by 8% in the last 16 weeks.

Sugar revenues

ABF sugar sales and profit remained “on track for the full year”,​ it claimed.  Sugar revenues for the third quarter were 15% lower than last year, which reflected a different phasing of UK volumes and the timing of shipments of Zambian exports to the EU.  Year-to-date sugar revenues were 1% ahead, it said.

The 2012/13 UK sugar beet campaign produced 1.15Mt of sugar, compared with 1.32Mt the previous year. While poor weather had delayed planting of this year’s crop, it was now making better progress, said ABF.  

Sugar production next year was expected to exceed both quota and the requirements for bioethanol production. 

The company was still negotiating sugar prices with growers, after the National Farmers Union rejected British Sugar's £3/t supplement to the agreed pricing mechanism.

“World sugar prices have fallen steadily over the past two years and we are now seeing some softening of European prices for the forthcoming year,”​ said ABF.

It predicted the EU’s decision to end sugar quotas after September 2017 would put “some pressure”​ on European prices. But “as a well invested business and one of the world's lowest cost producers” ​ABF was well-placed to succeed in the market, it claimed.

Primark sales were up by 22% year-to-date, with its pipeline of store openings looking “particularly impressive”​ for next year.

Double digit earnings

Jones predicted that, overall, ABP was on course to deliver double digit earnings per share (EPS) growth, after posting 18% EPS growth last year.

Panmure Gordon upgraded its advice on ABF stock from ‘hold’ to ‘buy’ and raised its price target from 1,800p to 2,100p. 

Shore Capital also attributed the grocery growth to ABF's Co-op deal. "We believe the primary driver for the improved performance has been the 15% uplift in volumes through Allied Bakeries from its new Co-op contract,"​ said analysts Clive Black and Darren Shirley.

Sales in Twinings Ovaltine remained in the low double-digit range, they added. Shore Capital retained its 'hold' advice on ABF stock.

Investec analyst Martin Deboo said the trading statement was reassuring. “EU sugar prices look to be avoiding a worst case scenario and news on the UK beet crop is ahead of our expectations,” ​he said.

While sugar beet costs for 2014 were likely to be similar to this year, farmers’ rejection of ABF’s £3/t increase for 2015 was a +£25M profit risk for the firm, said Deboo.

Investec maintained its ‘hold’ advice on ABF stock and its target price of 1,930p.

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