ABF Reveals Positive Trading Update, But Post Brexit Sterling Poses Uncertain Future

08 Jul 2016 --- Food company ABF have revealed its trading update for the 40 weeks ahead of 18th June 2016, showing YOY growth, with projections suggesting the initial impact of the weak Stirling is likely to benefit growth. However, continued low rates could damage results in the long run.

Revenue for the 40 weeks ended 18 June 2016 was 3% ahead of the same period last year at constant currency and 1% ahead at actual exchange rates. This reflects stronger growth in the third quarter of 4% at constant currency and 7% at actual exchange rates.

The Ingredients sector continues to build on the improvement of the last two years and operating profit remains substantially ahead, with the benefit of further recovery in yeast and bakery ingredients.

In the third quarter, sterling was weaker against most of the major trading currencies compared with the same period last year, resulting in a translation benefit for the company. Following the result of the EU referendum, the sterling weakened further, meaning a bigger translation benefit is expected in the final quarter with no material transactional effect. 

If current exchange rates continue, it’s good news for the company in the short run, with the outlook for the financial year improving. As a result, Associated British Foods no longer expect a decline in adjusted earnings per share for the group for the full year. 

However, if the low Stirling rates continue into the next financial year, it is likely to have both positive and negative effects on profit. It would have a favourable transactional effect on British Sugar’s margins and a translation benefit on group profits earned outside the UK, which last year were some 50% of the total.

But a low Stirling rate would have an adverse transactional effect on the profit margin on Primark’s UK sales, currently half of its turnover. With ABF’s partnership with Primark contributing to 60% of its operating profits, this could spell trouble ahead.

Fears that Primark’s UK success is stagnating after experiencing a slowdown in revenues over the last 18 months, adds to concerns.  

However, the company state they have a strong balance sheet and remain optimistic for the group’s continued growth, particularly with their plans for Primark’s expansion, which remain unchanged. 

by Hannah Gardiner