AB Foods confirms Primark split

Confirmation of the Primark demerger will grab the headlines, but it remains to be seen whether this will be enough to mask something of a kitchen-sinking exercise across the Associated British Foods (LSE:ABF) empire.

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The rationale for the demerger, which is planned to take place before the end of 2027, is clear even though the Primark business is facing a “difficult” clothing market, especially in Europe. The unit, long since the group’s jewel in the crown and accounting for half of group revenues, is possibly reaching a size where it requires laser focus to capitalise on its own growth prospects, particularly overseas where the greatest potential is seen. 

In the meantime, the half-year performance is not a strong advert for a standalone business. While the UK segment is holding up, with a 2% increase in sales to £4.66 billion and like-for-like growth of 1.3%, adjusted operating profit for the 24 weeks ended 28 February plunged by 14% to £471 million with margin declining from 12.1% to 10.1%, driven by European weakness. 

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A like-for-like sales decline of 5.6% marred the overall numbers, even though store openings in the US drove sales 12% higher. However, the US accounts for just 6% of overall Primark revenues at present, making this particular market a “jam tomorrow” contributor.

Quite aside from the challenging backdrop of a cautious consumer, the sector itself is famously competitive, and Primark now lines up against the likes of Chinese players such as Shein and Temu, while its online offering is still far behind that of Next. It is nonetheless continuing to invest heavily in the business, particularly around capacity and new technology.

At the same time, AB Foods considers that the market does not fully appreciate its other units, despite its portfolio, expertise and potential. As such, it feels that the sugar, grocery, ingredients and agriculture businesses would be better served by hiving off Primark so that investors can fully focus on the exposure to foods which gives the group its name. Unfortunately, at the current time, these units are providing little solace.

The Grocery division is the group’s second largest, accounting for 22% of overall revenues. Weak consumer demand in the US contributed to a 20% decline in adjusted operating profit to £179 million. Ingredients at 11% of group revenues comes next, but weak market demand for bakery ingredients resulted in a 7% decline in adjusted operating profit. 

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The remaining units, Sugar and Agriculture, did little to lift the mood. Sugar is now expected to fall to an adjusted operating loss for the year as a whole following a £27 million deficit this half, with lower average prices in Europe, while adjusted operating profit in Agriculture dropped by 54% to just £6 million. 

Unsurprisingly, then, the overall numbers make for bleak reading. Half-year revenue fell by 2% to £9.47 billion, adjusted operating profit by 18% to £691 million and adjusted pre-tax profit by 19% to £663 million, against expectations of £688 million. 

An unchanged dividend which currently yields 3.3% and an ongoing £250 million share buyback programme may cushion some of the blow, and the profit warning in January may have limited the damage which might otherwise have been wrought on the share price at the open today.

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The group is expecting a much stronger second half, although its guidance for the year as a whole remains at the levels which it previously revised downwards. Investors will now begin to judge Primark and “FoodCo” as the discrete businesses which they will become, and indeed this could yet result in the release of some pent-up value on both sides. 

In the meantime, however, the group is fighting fires on several fronts and the sharp fall in the share price at the open reflects this uncertainty, adding to a decline of 14% over the last year compared to a gain of 27% for the wider FTSE100. Investors will now be going back to the drawing board to mull whether the market consensus of the shares even as a hold reflects the challenging position in which the group is currently trapped, let alone the additional distraction of the demerger.