Associated British Foods: Negative Sugar Segment Guidance and Primark Slowdown Send Shares Lower

No-moat Associated British Foods issued a trading update for the second half of fiscal 2024 (ending Sept. 14, 2024), highlighting a hit to operating profit from falling European sugar prices and slower like-for-like sales growth at Primark due to poor weather in the UK and Ireland. The sharp decline in European sugar prices in the fourth quarter is expected to impact operating profit for the segment for both fiscal 2024 and 2025, with a much larger effect in 2025. The group anticipates that the sugar segment's operating profit in fiscal 2025 will range between GBP 50 million and GBP 75 million, down from an expected GBP 200 million in 2024. Profitability is forecast to rebound in fiscal 2026, driven by lower contracted beet prices and normalized demand. We don’t expect to make any material changes to our GBX 2,600 fair value estimate as the fiscal 2025 sugar operating profit hit is broadly offset by a time value of money adjustment in our forecast. The 2024 profit guidance is aligned with our estimates. The share price was down more than 5% following the release, with the shares now offering a 10% discount to fair value.