By Scott Wright

SHARES in Primark owner Associated British Foods (ABF) closed lower last night after it raised the prospect of supply shortages because of the spreading coronavirus in China.

But the company, which as well as clothing has extensive interests in food and sugar production around the world, still expects first-half profits to be ahead of last year, driven by profit growth at Primark and the second half weighting of profits from AB Sugar.

ABF, which owns the Twinings, Ovaltine and Kingsmill brands, said Primark stocks a “broad assortment of its product from China”, and currently has stock in place for several months, having built up inventories ahead of Chinese New Year.

It does not expect a short-term impact on stock levels as a result of the worsening COVID-19 outbreak, which has now claimed the lives of nearly 2,600 people in China and is spreading quickly in Italy.

But ABF cautioned in a statement to the stock market: “We are working closely with our suppliers in China to assess the impact on their factories and supply chains and their ability to fulfil our current orders. If delays to factory production are prolonged, the risk of supply shortages on some lines later this financial year increases.

“We are assessing mitigating strategies, including a step up in production from existing suppliers in other regions.”

The warning from ABF comes shortly after the owner of Scotch whisky giant Chivas Brothers, Pernod Ricard, slashed its profit forecast in light of the risk from coronavirus in China, one of the distiller’s most lucrative emerging markets.

Sophie Lund-Yates, equity analyst at Hargreaves Lansdown, said: “There’s concern the coronavirus could disrupt Primark’s supply chains, because Primark sources a broad range of its products from China.

“The good news is the group has existing suppliers in other regions, which could be called on to plug any holes in the production line. It also builds stock in the lead up to Chinese New Year, meaning it has extra inventory to fall back on for now. The net effect is Primark is well placed to handle near-term disruptions, but it’s one to keep an eye on.”

Sales in Primark stores continue to perform strongly, ABF said.

The company expects first-half sales to be 2.5 per cent ahead of the same period last year at constant currency rates, driven by increased selling space and steady like-for-like sales. In the UK it expects Primark sales to be up 3% on the first half of last year. A strong contribution from new selling space will be partially offset by a 1.3% fall in like-for-like sales. “Trading was particularly good over November and December, but weakened in January and February against very strong comparatives in the prior year,” ABF said. With an expected decline in margin, ABF forecasts operating profit for Primark will be marginally down on last year at constant currency and on a lease-adjusted basis. Reported operating profit will be higher.

ABF said higher prices in the European Union (EU) and increased export sales at South Africa-based Illovo,will result in higher first-half revenue for AB Sugar. “These higher EU prices, combined with reductions in the cost of sugar production, will deliver an increase in operating profits for the first half,” the company said. ABF added: “Operating profit for the full year remains in line with our expectations.”

Ms Lund-Yates said: “Overall Primark continues to buck the bleak high street trend. Coronavirus is a potential headwind, but as a dynamic situation it’s too early to say how things will turn out.”

Shares closed down 40p at 2,543p.