July 5, 2018 / 7:06 AM / 9 months ago

UPDATE 2-Sugar outlook sours for Primark-owner AB Foods as prices fall

* Sugar profit expectations worsen for current, next year

* Primark profit outlook improves

* Shares fall as much as 5.7 pct (Adds detail, finance director, analyst comment, shares)

By James Davey

LONDON, July 5 (Reuters) - Britain’s Associated British Foods warned that lower European Union prices would hit profit in its sugar business, sending shares in the owner of the Primark fashion chain sharply lower on Thursday.

AB Foods stuck to its overall forecast for “progress” in adjusted operating profit and adjusted earnings per share (EPS) for the year to September 2018, saying the sugar weakness would be offset by higher margins at Primark, which accounts for about half of its revenue and profit.

Shares in AB Foods, which also owns major grocery, agriculture and ingredients businesses, fell as much as 5.7 percent, the biggest faller on Britain’s FTSE 100 index.

Revenue at its AB Sugar business, which contributed about 16 percent of group profit last year, fell 17 percent in the third quarter to June 23, which the group said was entirely the result of much lower EU prices hitting its British and Spanish businesses. It warned on sugar profits in January.

EU sugar prices were continuing to fall, driven by low world sugar prices and excess supply following very high sugar production in the EU last year, it said.

For the group’s next financial year (2018-19) this level of EU sugar prices would represent a substantial reduction compared to those achieved this year, AB Foods said.

“As a result, our expectations for sales and profit at AB Sugar, both for this financial year and next, are lower than previously expected,” it warned.

Analysts had on average been forecasting group adjusted operating profit of 1.4 billion pounds ($1.85 billion) and adjusted EPS of 134.4 pence for 2017-18, Reuters data showed, up from 1.36 billion pounds and 127.1 pence made in 2016-17.

Finance Director John Bason declined to say what impact the warning on 2018-19 sugar profit would have on the overall group outcome for that year.

“While the downgrade in guidance for the sugar business is a little disappointing, the upbeat sentiment on margins at Primark is encouraging and we expect earnings momentum to resume once the sugar business stabilises,” said analysts at Investec, who have a “buy” stance on the stock.

Third quarter sales at Primark were 6 percent ahead of last year on a constant currency basis, with like-for-like sales showing improvement from the first half outcome.

“We’ve really got the fashions, we’ve got the best prices around,” said Bason.

“Rather than having to shop, people want to shop in Primark stores and when the weather’s been good we’ve seen big increases in like-for-likes (sales),” he said.

Primark’s second half operating margin was forecast to be “well ahead” of last year, thanks to better buying terms and the beneficial effect of a weaker U.S. dollar.

The fashion retailer sources the majority of its goods in dollars from the Far East. ($1 = 0.7555 pounds) (Editing by John Stonestreet/Jane Merriman/Alexander Smith)

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