But Panmure Gordon sees reasons to be optimistic about both businesses. It is recommending that investors buy into ABF stock, and maintains its “hold” advice for the Cathedral City cheese producer.
On Tuesday (November 8), Panmure is expecting “broadly flat profits” from ABF, whose brands include Kingsmill, Twinings and Ryvita.
In a preview note, analyst Graham Jones added: “We forecast profit before tax and earnings per share broadly flat at £818M and 72.4p respectively, with strong growth in profits in sugar and agriculture offset by a sharp fall in profits in ingredients and a modest fall at Primark.”
Accelerate
But he added: “We expect growth to accelerate significantly to 16% in 2012, driven by strong growth in sugar profits and Primark returning to profit growth.”
Jones said ABF itself had expected net income for 2011 to be broadly in line with 2010.
Although Jones said trading conditions in developed markets would remain difficult, he predicted that cost pressures should ease and ABF would benefit from the continuing high price of sugar.
“While sugar prices have come off their highs, they remain at historically high levels and combined with tight supply in Europe, the sugar division should deliver strong growth,” he said.
Jones expects Dairy Crest to deliver a 3% increase in interim operating profits on Thursday (November 10), to £52.2M, but said £2M of this will have been achieved through property deals.
“Excluding the property gain, underlying operating margins are expected to have declined to 6.4%,” he said.
“We expect adjusted profit before tax to increase 4% to £41.7M but forecast that a higher tax rate will result in a 3% decline in adjusted earnings per share to 20.8p.”
Cathedral City
He added: “We expect that the cheese division will report another period of high growth, with operating profits increasing by 44% to £18M, benefiting from higher retail pricing of brands such as Cathedral City and the effect of lower-priced milk being used in its production last year.”
But the picture was different in the spreads business, where the benefits of price increases were likely to have been neutralised by higher input costs.
“However we expect the pressure in the dairies business to result in operating profits declining 37% to £6.9M, indicating an operating profit margin of only around 1%, excluding the property gains.”
Dairy Crest’s shares have fallen by some 20% this year and currently represent fair value for investors, Jones said.
Panmure has also repeated its “buy” advice for Unilever, whose food brands include Flora, Ben & Jerry’s and PG Tips.
The company’s third-quarter sales figures showed “very strong top line growth”, with a like-for-like increase of 7.8% - ahead of analysts’ forecasts.
Although Unilever expects its margins to remain under pressure, Panmure said: “This does not change our view that Unilever is a much more competitive animal than historically.”