Associated British Foods is leading the fallers in a downbeat market on concerns that its continuing success at discount fashion retailer Primark could be overshadowed by a poor performance from its sugar division.
In its latest update the company maintained its guidance for its annual earnings, with a strong showing from Primark and its grocery business offsetting lower sugar prices and a £50m hit from the recent strength of sterling. Primark full year sales are expected to be 16% ahead of last year at constant exchange rates, helped by an increase in selling space of 1.2m square feet. But profits for AB Sugar were forecast to be substantially lower than 2013, with lower sugar prices, lower volumes in north China and a £20m currency hit.
Its shares, a strong performer in recent weeks, are currently 118p or 4% lower at £27.91. Analyst Darren Shirley at Shore Capital said
We believe there is scope to nudge up our 2014 earnings per share forecast of 103.3p by 1p-2p, driven by Primark margins.
Sugar [is] a challenged division, as expected. Management continues to view the world sugar price of around 17 cents a pound as unsustainable, and below the global average cost of production, though there appears to be little to move prices higher in the short/medium term. Trading conditions for 2015, as previously highlighted, look even tougher, with much weaker selling prices in the EU being realised, which will also impact [African sugar producer] Illovo, and global prices continuing to hold back China and also Illovo.
There is no doubt that ABF is a high quality business, and that Primark is currently one of the world's most potent apparel retailers, steadily building market leading positions across many of its European operations and with excitement of the US to come in 2016. However, despite the expectation of tweaks to forecasts we cannot ignore the fact that sugar woes continue to hold back progress at the group level...As such, trading on a demanding 2015 PE of 27.5 times (which implies a Primark PE of around 35 times) ... we struggle to see upside on a 6 months view, and potentially longer, we therefore reiterate our hold recommendation.
Sterling strength of course is not a worry at the moment, with the pound sliding on fears of a yes vote in the Scottish referendum and the subsequent economic and political uncertainty.
Scottish related businesses are also among the leading fallers in the market, with Royal Bank of Scotland down 8.2p to 338.8p, Standard Life 9p lower at 407.5p and Weir off 45p at £26.74.
Sentiment has not been helped by the fragile ceasefire in Ukraine failing to hold over the weekend, leaving the FTSE 100 39.11 points lower at 6815.99. Poor Chinese trade figures and a delayed reaction to the disappointing US non-farm payroll numbers are also negative factors.
Among the risers Randgold Resources is 46p better at £47.83 even though JP Morgan trimmed its target price from £53 to £52.
Arm has added 12p to 968.5p following a Deutsche Bank-hosted telecoms and technology conference at the end of last week and ahead of this week's launch of Apple's iPhone 6, where the company is a supplier. Deutsche said:
[Arm] expects the worst to be over for royalties and should see pick up by the fourth quarter while quarter three is still expected to be weaker. Royalty growth in quarter four is largely a derivative of the traction for the new iPhone - a weak launch could negatively impact and stall the royalty growth.
Going into 2015, Arm expects a higher adoption of ARM v8/8 core/big.LITTLE – which would ultimately drive a stronger increase of percentage royalty rates than in previous years. Mali traction remains healthy and 500-600m units remains comfortably achievable this year.
Arm noted that their long term 15% industry outperformance target is based on around 10% smartphone unit growth and they believe they can grow smartphone royalties at twice this rate.
Recent licensing strength is a clear sign that Arm's business model is less mature than thought and there is higher future growth to come than expected.
