September 12, 2016 / 6:20 AM / 3 years ago

AB Foods flags UK pension deficit, hit from sterling

LONDON (Reuters) - Associated British Foods said on Monday its UK pension scheme would slide into a deficit due to rock-bottom government bond yields, highlighting a major downside for businesses from record low interest rates aimed at stimulating economic growth.

The Primark logo can be seen on windows at Primark's new Spanish flagship store in Madrid, Spain, October 15, 2015. REUTERS/Andrea Comas

The owner of discount fashion retailer Primark also said the chain’s profit margins would suffer next financial year from a fall in sterling following Britain’s vote to leave the European Union, as it would not raise prices to offset the impact.

“We’re standing by our consumers in terms of that best value for money,” AB Foods finance director told Reuters.”I am flagging we’re prepared to take a margin decline.”

The comments sent AB Foods shares down as much as 9 percent, outweighing a rise in the group’s overall earnings outlook.

While Britain’s economy has held up better than many economists had expected in the immediate aftermath of the Brexit vote, businesses remain cautious, particularly until they have a clearer idea of future trading arrangements with the EU.

The Bank of England’s move to support growth by cutting interest rates and pumping more money into the economy is also having a mixed impact on companies due to a drop in UK long-term bond yields, which are used to value defined benefit pension obligations for accounting purposes.

AB Foods said it now expected a year end deficit on its UK pension scheme of 200 million pounds ($265 million), still small in comparison with many other UK blue-chip companies but against a small surplus last year.

Sterling’s 10 percent drop against the U.S. dollar since the June 23 referendum is also a double-edged sword, helping exports but hurting importers such as discount clothing retailers which source many goods from Asia, priced in dollars.

AB Foods said Primark’s margins in the year ending Sept. 17 would not be affected due to its hedging policy.

But at current exchange rates, there would be a hit to the margin on UK sales - about half of Primark’s total - next financial year, it added, without quantifying the impact.

Accendo Markets analyst Henry Croft said weather forecasts also pointed to a challenging time for Primark, which accounts for about half of AB Foods’ profit.

“A mid-September heatwave could even make things worse for Primark delaying the start of the all-important autumn/winter season,” he said.

Echoing other British retailers, Bason said that although Primark’s sales were soft in the immediate couple of weeks after the Brexit vote there had been no sustained impact on consumer behaviour.

“The consumer does have more disposable income than they had one or two years ago and so there is that basic underlying positive for consumers,” he said.

Bason was speaking after AB Foods raised its earnings guidance for the second time in two months, benefiting from the boost to export earnings from the weaker pound at a time when its import costs were protected by hedging.

The group, which also has major sugar, grocery, agriculture and ingredients businesses, now expects earnings per share (EPS) for the 2015-16 year to be marginally ahead of the 102 pence made in 2014-15.

Full-year sales at Primark are expected to be 9 percent ahead of last year at constant currencies, with sales at stores open over a year down 2 percent, reflecting unseasonable weather patterns.

(Fixes typo in paragraph 9.)

Editing by Kate Holton and Mark Potter

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