Associated British Foods (ABF) is the UK processor that stands to gain the most from declining volatility in sugar prices, according to Phil Spencer, analyst at investment specialist Brewin Dolphin.
Spencer said sugar prices in Europe were settling down after the period of upheaval over the past few years as the EU Sugar Regime was restructured. This restructuring ended last October. Now EU sugar prices were stabilising, whereas in the rest of the world they had rocketed and were “almost entering crisis mode”, said Spencer.
EU prices were comparatively so attractive that the export market for European sugar looked extremely strong, he said. In an investor’s note, Spencer said: “We believe the stage is set for ABF to generate double-digit earnings per share growth in the medium term ...” Part of the reason for this was that “the restructuring of the EU Sugar Regime is complete, which should result in a stable earnings stream at [ABF-owned] British Sugar”
Bright future for British Sugar
Although ABF’s sugar business had experienced a significant decline in profitability over the past five years due to lower support prices and reduced EU quotas, Spencer said: “EU sugar appears to be entering a period of stability ... and prospects for the business [British Sugar] have dramatically improved.”
In addition, ABF’s acquisition of African sugar producer Ilovo last year for £317M and Spanish sugar producer Azucarera Ebro for £385M had secured its sugar supplies and increased its exposure to emerging markets.
ABF was also emerging from a period of investment and acquisition, from which it would now reap the benefits, although it could take 2-4 years to see significant payback, said Spencer.
In an interim management statement issued on January 14, covering the 16 weeks to January 2, ABF said sugar revenues for continuing businesses, excluding Azucarera, were 23% ahead of the same period last year. Including Azucarera they were 68% ahead. Profit benefited from higher volumes, better factory efficiencies and lower energy costs together with a strengthening of the euro.
Benefits of Kraft’s Cadbury acquisition
He said Kraft Foods’ acquisition of Cadbury could also benefit ABF, as former UK Cadbury investors could divert cash into it as one of the few remaining large UK-owned food businesses offering significant returns.
By contrast, he said Tate & Lyle would also see benefits from the more favourable European sugar market, but this would be partially offset by other factors. “Tate still has exposure to the highly cyclical paper industry through its industrial starches business, ethanol profitability has collapsed, and the company has mothballed [in the US] one of its two sucralose plants where forecasted demand has not panned out.”