Profits from Associated British Foods’ (ABF’s) sugar division could surge 67% from £189M to £316M in 2009-2012, while volumes could surge 40% within five years, analysts at Panmure Gordon claim.
Profits from the UK sugar business slumped from £136M in 2005 to just £43M in 2008. However, they edged back up to £80M in 2009 and could recover to more than £100M in 2010, predicted analyst Graham Jones.
ABF has not publicly revealed its ambitions for volume growth. However, the firm, which issued a pre-close trading statement this morning, said profit from its sugar operation would be “substantially ahead of last year”. UK sugar production is estimated to be 1.3Mt compared with last year’s 1.19Mt, while sugar prices in China had “increased substantially and are currently at record levels”
In a 44-page research note examining ABF’s prospects, Jones said he saw potential for a 40% increase in ABF’s sugar volumes from 3.8Mt in 2009 to 5.4Mt over five years. The prediction is based on a 500,000t increase in China, a 700,000t increase in Africa, and the filling of a new 400,000t refinery in Cadiz, Spain.
While adapting to the new EU sugar regime had been painful, well over half (60%) of ABF’s sugar volumes were now in “attractive emerging markets with substantial growth potential”, said Jones. “EU profitability is also recovering strongly, and we see growth from the new Cadiz refinery in Spain and Vivergo fuels.” (ABF has a 45% stake in Vivergo Fuels, which is building a £200M bioethanol refinery in Hull.)
China to break even in 2010
Meanwhile, the Chinese sugar business, which lost a lot of money last year, should break even in 2010, predicted Jones. There was also significant scope for improvements in yield, he said. “There is no reason why Chinese yields could not approach those in the UK. Ultimately we believe beet sugar production could reach 500t, giving ABF total sugar capacity in China of 1.1M tonnes.” Much of this would meet domestic demand, with Chinese sugar consumption growing strongly at 8-9% a year, he said.
Investec Securities analyst Martin Deboo agreed that the situation was looking more promising in China: “Following a bloodbath in 2009, ABF’s new venture sugar businesses in China look to be heading back towards break-even.”
Shore Capital analyst Clive Black added: “ABF is ticking the right boxes at the right time for us.”
Investment in Africa
While profits at British Sugar’s African business Illovo have been lower due to unfavourable currency movements and a lower than expected crop, major investments in Zambia and Swaziland are expected to start paying off, and Azucarera - the Iberian producer ABF acquired last April - is also expected to start delivering returns this year.
Although reform of the EU sugar regime has proved painful, it has been ultimately successful in that EU quotas have fallen from around 18.6Mt to around 13.3Mt. EU consumption is fairly stable at around 16.5Mt, with the shortfall made up by imports.