Bottom Line: ABF cash wizards lose magic touch

THE MARKET has grown so used to Associated British Foods' treasury team defying gravity that its fall to earth has come as a bit of a shock.

It was never expected that the group could match the 12.4 per cent return on its cash pile achieved in last year's first half thanks to a bit of judicious speculation around Black Wednesday, but 4.5 per cent was more meagre than feared.

The prospect that it will stay that way for the rest of the year was enough to knock 15p off the shares to 583p.

The importance of the cash pile - pounds 827m and growing - is demonstrated by the fact that even a 13 per cent rise in profits from the trading businesses failed to offset the drop in investment income and, but for a rise in the value of its Berisford stake, profits would have been 5.6 per cent down.

ABF has been touted as a potential purchaser of Allied-Lyons' food business, widely believed to be on the market for up to pounds 1bn. But it is difficult to see why ABF should dilute its specialist tea business with the mass-market Tetley, where competition is already cut- throat. Or, having closed one biscuit factory, why it should be interested in taking on another.

As for trading, there is little sign of improvement in the bread market. Despite Tomkins' ownership of Ranks Hovis McDougall, the one- offs that produced a bumper result at British Sugar last year are unlikely to be repeated, and competition for supermarket shelf space is hardly decreasing.

Forecasts of pounds 310m, down from pounds 338m, put the shares on about 13 times earnings, a premium to the sector. The meagre 3.4 per cent yield, even if the dividend is raised to 15p, offers little compensation.