Investment: ABF's results prove it has recipe for success

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The Independent Online
THE STRENGTH of sterling continues to be a major headache for Garry Weston's Associated British Foods.

The strong pound hammered the Twinings Tea and Burton's biscuits group at the interim stage in April and yesterday's full year numbers showed further scars. A pounds 37m currency hit pushed profits down from pounds 426m to pounds 391m, excluding exceptionals.

The pound may have eased slightly but not enough to make much of a difference. It will continue to hurt British Sugar where profits fell by pounds 28m to pounds 151m last year. A bumper crop boosted processing volumes but this was not enough to counter the currency impact. The division was also hit by a pounds 28m fine from the European Commission for alleged price fixing by the company in the 1980s. This necessitated a pounds 19m provision in the full-year accounts.

Elsewhere, milling and baking profits were hit by the poor harvest last year and overcapacity in the baking market. But in the US the food ingredients businesses have done well with combined profits rising by pounds 10m to pounds 19m helped by a strong performance from the AC Humko speciality oils business. Last month's pounds 120m acquisition of SBI, which produces ingredients for the beauty industry, will increase ABF's presence in this sector.

Although trading will continue to be tough, investors can expect Mr Weston to find a few more uses for ABF's notorious cash pile. Currently standing at pounds 1.5bn and yielding income of pounds 119m, the warchest has more buying power in the present environment of weakening asset values. Although no-one should expect a mega-deal from the cautious Mr Weston, ABF is expected to continue adding on growth businesses in core areas such as food ingredients.

This is not one of ABF's more exciting phases - its trading profits have gone virtually nowhere over the past few years. But it remains a steady performer. On current year profit forecasts of pounds 425m, the shares - up 29p to 589p yesterday - trade on a forward p/e of 18. That is just behind the two most highly rated British food companies, Unilever and Cadbury Schweppes. A solid hold.