Associated British Foods’ grocery brands

Associated British Foods’ earnings announcements have followed a similar pattern of late.

Primark good, sugar bad – has been the story for well over a year and its full-year results today suggested the situation will continue well into 2014/15.

Overall, ABF reported 3% decline in headline annual revenues as a 16% boost to Primark’s sales was offset by a 22% year-on-year decline in its sugar business. ABF also warned of a “large reduction in profit from AB Sugar” next year.

The investor case for Associated British Foods remains dominated by Primark – with brokers’ overall view on the stock heavily reliant on their growth expectations for the value clothing retailer. It is no surprise that conversation around ABF is Primark-centric, given its 29% year-on-year profit growth means the retail chain now accounts for 55% of the group’s operating profit.

Although there are some worries whether Primark can continue its blockbuster growth (Jefferies analysts worry how much the mild European weather may have diluted Primark’s Q1 like-for-likes), most see the potential of its move into the US as supportive of longer-term rapid growth.

So the Primark v Sugar situation looks set to continue, with weakness remaining in the sugar division due to ABF making higher payments to UK farmers amid continuing low EU sugar prices. ABF would not be drawn on how much the “large reduction in profit” next year constitutes, but advised that it only expects to see performance improve in 2015/16 as the EU pricing environment eases.

ABF’s share price jumped up 4.2% to 2,783p today on the booming Primark sales and profit growth as management had already warned over the continued sugar weakness, which had largely caused the 14.3% share price drop from mid-September to mid-October.

With all attention lavished on Primark and the problems in its sugar division, the quiet progress ABF is making in its grocery division is easy to overlook.

Although revenues were down (6% reported, 1% constant currency), adjusted operating profit improved by 20% and margin rose to 8.1% from 6.3%. This profit improvement is especially notable given that around a third of the group’s grocery earnings stems from the UK, which is seeing an unprecedented disruption in the grocery retail market.

No wonder then that analysts at Shore Capital called the recovery in grocery EBIT to £269m (from £224m in 2013) “very encouraging”.

The majority of this improved profit and margin came from Australia – where George Weston Foods saw “a major improvement in performance” – and the US, where sales at its ACH business were up largely due to increased demand for Mazola. Q4 revenue performance was also boosted by favourable commodity price movements.

However, ABF looks to be holding its own in the UK grocery market despite the chaotic retail environment. Although no figures for UK grocery were split out, revenues and profit at Allied Bakeries were ahead of last year, while AB World Foods saw revenue growth in the UK for Patak’s and Blue Dragon brands.

ABF’s FD John Bason also stressed the success of Twinings (and Ovaltine), which has grown worldwide, but has also seen “very rapid growth” in sales value and market share in the UK to become the country’s no. 2 tea brand.

The primary area in grocery where performance was weak is Silver Spoon, but the issue there is related to the loss of specific contracts (including a number of contracts at Asda) in a competitive marketplace rather than being down to structural challenges in the market. ABF would not be drawn on the prospects for Silver Spoon next year, only to say they are “fighting hard” to win back business.

Analysts broadly welcomed the results – though clearly most focussed on Primark’s sustained growth.

“We continue to view ABF as an attractive investment due to the long-term growth potential of the Primark business,” analysts at JP Morgan Cazenove noted: “Guidance suggests weakness in sugar will hold-back operating profit in FY15 but we think this is consistent with the company’s September communication and do not envisage significant changes to consensus.”

Primark continues to dominate the investment story, but away from sugar there are plenty of other causes for optimism for those who look hard enough.