ABF and Ranks Hovis McDougall dominate the UK bread market, which is in poor shape. Supply outstrips demand and the powerful supermarket retailers have been slicing the producers' margins relentlessly.
Last autumn takeover merchant Tomkins pipped Hanson, the doyen of corporate acquirors, to buy RHM for pounds 925m. Expectations were that Tomkins would invigorate the bread market by cutting capacity, creating a more profitable environment.
But ABF's results show no sign so far of any realignment in the market for milling and baking. And they suggest that Tomkins could have a long fight on its hands.
ABF's overall operating profits fell 10 per cent to pounds 131m in the 24 weeks to 27 February. The bad performance in bread was partly masked by solid improvement from sugar.
The group was able to report increases in pre-tax profits and earnings per share only because of one-off gains from Black Wednesday. ABF, which has pounds 700m of investments, bought high-yielding gilts ahead of 16 September, betting correctly that interest rates would fall. A pounds 35m contribution from investments in the previous first half turned to a pounds 45m contribution last time.
Taxable profits rose 7 per cent to pounds 161m and earnings climbed to 23.9p from 21.2p. On the basis that profits almost double in the full year, pre-tax results will reach pounds 300m and earnings per share 44p. This suggests the shares, down 16p to 479p yesterday, are trading on a prospective p/e of 11.
That represents a chunky discount to the rest of the stock market but, with problems in bread unresolved and a repetition of the spectacular investment returns unlikely, ABF shares remain unattractive. Sell.