Does AB Foods need a Primark deal?

Shares in AB Foods have lost a quarter of their value in the past year, increasing focus on its sugar and Primark divisions. Graeme Evans reports.

As sugar continues to drag on Associated British Foods, investors may be forgiven for thinking a little harder about whether it's time the conglomerate considered "doing a Whitbread" with prized asset Primark.

The company's shares last traded at £30 in November, since when the FTSE 100 stock has slumped by almost a quarter when including an initial 2% fall seen after today's 2018 pre-close update.  

The statement reinforced recent frustrations for investors, with much lower profitability in the sugar business offsetting progress at retailer Primark and the other operations covering agriculture, ingredients and groceries.

The campaign to separate the Primark success story from the rest of the business has been nowhere near as loud as that faced by Whitbread over recent months.

But given that the leisure group has just sold the coffee chain Costa for an eye-watering £3.9 billion, it won’t be a surprise if some AB Foods investors have been looking more closely at Primark's stand-alone value.

AB Foods has been consistent in saying that the group's sugar operation and retailer Primark should stay together, arguing that they benefit from being part of a larger business.

But as long as shares are trading at current levels, there will always be pressure in some quarters for corporate action. However, analysts at UBS think that a return above £30 is attainable based on trading performance alone.

They have a price target of 3150p, despite some disappointment today that currency movements will mean that Primark's margins guidance for next year is in the region of 11% rather than its own forecast for 11.5%.

UBS said that 11.5% may still be achieved but this would depend on a recovery in the pound and a good markdown performance by the retailer.

Primark is on track to record 5.5% growth in sales on a constant currency basis in the current financial year, with increased selling space offsetting a 2% decline in like-for-like sales. In the UK, the chain has bucked the difficult conditions to achieve same-store growth of 1.5%.

As previously flagged by the company, the sharp decline in sugar trading will lead to a big drop in the division’s profitability. UBS thinks it will be in the region of 55% this year, followed by break-even in 2019.

Elsewhere in the AB Foods conglomerate, the company reported excellent sales growth for its Twinings and Ovaltine brands, as well as progress in reducing losses at Allied Bakeries.