AB Foods Raises Annual Profit Forecast on Decline in Pound

(Bloomberg) -- Associated British Foods Plc, the British owner of the Primark budget clothing chain, raised its earnings forecast for the year as the pound's weakening in the wake of the EU referendum will boost profits from outside its home market.

The pound at its lowest in more than 30 years will provide a favorable translation effect at its sugar business and for profits made outside the U.K., the London-based company said in a statement Thursday. As a result, the company no longer expects a decline in full-year adjusted earnings per share. Performance in sugar improved, leading to a 4 percent currency-adjusted sales gain for the company in the third quarter. The shares rose as much as 7.1 percent in London.

While sterling's weakness will hurt profit margins at Primark, “that's one negative against the two positives” of a favorable effect on sugar and group profit earned outside the U.K., Finance Director John Bason said by phone. Primark's sales rose 7 percent in the first 40 weeks of its year, hurt by unpredictable weather in recent months.

The maker of Twinings tea is increasingly leaning on its sugar business amid slower growth at Primark. U.K. retailers could see more pain following Britain's vote to leave the EU as the dollar's strength and weakening consumer sentiment weigh on results, analysts at Jefferies and Deutsche Bank have said. Marks & Spencer Plc reported a steep deterioration in clothing sales Thursday.

Created Uncertainty

AB Foods said that while the EU referendum has created uncertainty, its business spans 48 countries and it does little cross-border trading between the U.K. and rest of EU.

“Despite short-term concerns, ABF's long-term fundamentals appear robust and we retain our conviction that Primark and Sugar will power mid-term profit growth,” analyst Robert Waldschmidt at Liberum said in a note.

AB Foods gets about half its profits from outside the U.K., and has expanded the Primark chain into the U.S. over the past year to offset slower growth in its home market. It's too early to say whether Britain's vote to leave the European Union will dampen consumer sentiment in the U.K., Bason said. Primark, the company's largest business in the U.K., is expected to remain resilient if the economic environment deteriorates, the executive said.

The company had previously forecast a marginal decline in adjusted earnings per share for the full fiscal year.

To contact the reporter on this story: Thomas Buckley in London at tbuckley25@bloomberg.net. To contact the editors responsible for this story: Matthew Boyle at mboyle20@bloomberg.net, Thomas Mulier