Profits are in fashion

SCRUTINEER

AB Foods

871p -19p

Wolfson

123.5p -5.5p

FOOD production and retailing. Not exactly ideal industries to be exposed to just now. Yet one of the biggest players with a major presence in both sectors is managing to earn a decent crust.

Founded in the 1930s as a bakery business, Associated British Foods boasts more than 85,000 staff in 43 countries.

Most UK consumers will be pretty familiar with its brands, which include Kingsmill, Ovaltine, Ryvita and Silver Spoon.

Perhaps less well known is AB Foods' ownership of the Primark chain.

At first glance, a discount clothing business doesn't appear to be a logical fit with loaves of bread and bags of sugar. Yet, the fast-growing competitor to the likes of Asda's George, Tesco and TK Maxx is the real star of the sprawling AB Foods' portfolio.

Yesterday's interim results revealed a 22 per cent rise in profits at Primark to £111 million as sales jumped by a quarter to a shade under £900m.

The numbers were boosted by the opening of new stores in the UK, Ireland and Spain, giving Primark 173 outlets and some five million square feet of selling space.

The chain, which has previously swallowed C&A and Littlewoods stores, can now lay claim to 10 per cent of the UK market by volume. Not only does that make Primark the nation's second-largest clothing retailer, it also provides a headache for middle-market merchants such as Next and M&S, hoping to ensnare budget-conscious consumers with so-called "value offerings".

A further eight store openings are planned by Primark for the second half, including four in Spain.

Elsewhere, steady performances at AB Foods' grocery, ingredients and agriculture divisions meant group pre-tax profits rose by 5 per cent to £282m in the six months to 1 March.

However, a sour taste was left by the group's sugar operation, which has suffered in the wake of cuts in the EU sugar quota and adverse weather. Operating profits there tumbled by a third to £58m.

Investors have been warned that none of the business units is immune from the credit squeeze, with rising commodity prices and energy costs hitting consumers.

That cautious outlook weighed on AB Foods' share price yesterday, as did a lack of earnings upgrades.

The full-year outcome still looks promising, though, and the advice from the City is to sit tight.

WOLFSON Microelectronics, the audio microchip maker, has been getting a hammering in analysts' notes and on trader forums in recent months, but there are still some in the City who believe it can at least stick to its own guidance, writes Hamish Rutherford.

Wolfson, which makes chips that convert digital signals into sound in millions of mobile phones and digital music players, was a darling of the City on the back of a run of forecast-beating results. This sent the University of Edinburgh spinout into the mid-cap FTSE 250, but the past 18 months have brought a series of growth warnings as the market for consumer electronics has slowed.

The most recent setback came when Apple dumped the Edinburgh-based group's audio chips from its next generation of iPods.

Such a swing in fortunes has seen about three-quarters of the value of its shares wiped out. They are now at about the level they were floated at in 2004.

But there are still some in the market who believe the company is being treated unfairly – Dan Ridsdale at Landsbanki Securities for one. Ridsdale was positive yesterday when previewing Wolfson's first-quarter results, saying the company "appears to have regained some impetus in terms of product innovation and design-win momentum".

He argues that, accounting for its strong balance sheet – Wolfson is sitting on a small mountain of cash – the shares are trading at a discount of about 40 per cent to its similarly sized peers, something that "should not be ignored".

Wolfson claims that despite the hit from Apple it will maintain growth this year, something many analysts have all but dismissed.

If management are to be believed then the shares would appear to be a bargain. But the gap between Wolfson and its peers implies the management have a credibility gap.

Tomorrow the picture should become clearer when the company reports first-quarter results.