July 10, 2018

Pegler’s market report – 10.07.18: AB Foods being dragged down by the sweet stuff

As published in the Brighton Argus (10.07.18) Business section under the title Pegler’s Market Report:

AB Foods being dragged down by the sweet stuff

It appears that Primark is being dragged down by AB Foods’ sugar division, which is struggling to deal with a collapse in the price of the sweet stuff. The diverse company has long been questioned about the possibility of spinning off its successful value fashion chain, but the answer has always been the same: being part of a larger group gives all its businesses more financial firepower.

Some analysts believe AB Foods may reconsider keeping Primark as part of the group if the demerger of Whitbread’s Costa Coffee business goes smoothly. Whitbread, which also owns Premier Inn, came under pressure from investors who said it didn’t make sense to have a coffee shop chain and hotel group under the same roof.

J Sainsbury pleased the market as first-quarter results met expectations and the supermarket group confirmed its full-year guidance. There were the usual comments about the market remaining competitive, however senior management provided a more positive assurance that the merger with Asda would create a more resilient and acceptable business for the future.

The biggest slowdown in sales was in Sainsbury’s groceries division where total revenue rose by 0.5pc compared with 2.1pc in the fourth quarter and 3pc in the same period a year ago. Sainsbury’s, which also owns the retailer Argos, reported a better performance in its general merchandise and clothing businesses. Sainsbury’s is currently in talks with Asda to create the UK’s largest supermarket group, which would see it leapfrogging current leader Tesco if the deal goes ahead.

Persimmon saw higher revenues in the first half of 2018. In a trading update, the UK’s second largest housebuilder generated revenues of £1.84bn in the six months to the end of June, 5pc higher than the same period last year. Housing completions rose 3.6pc to 8,082. The average selling price of a Persimmon home was 1.2pc higher at £215,800. In the first half, the group brought 45 new land parcels, for the delivery of 11,000 new homes. The group’s total land spend in the period was £343m, down 7pc from the £369m spent a year earlier.

In economic news, the US has officially fired the first shot in its trade war with China by imposing tariffs on $34bn of goods, prompting Beijing to retaliate with its own measures just hours later. The Chinese commerce ministry said that it had “to defend national core interests” by striking back against the “trade bully” that it believes is putting the global economy at risk.

The US president told reporters that another $16bn of tariffs will be introduced in two weeks and warned that his administration could eventually introduce tariffs on a further $500bn of goods from China. However, the 213,000 gain in jobs last month is further evidence that uncertainty over trade policy isn’t yet having a major impact on the US economy.

By David Pegler, Brighton Capital Management