Sign up Australia
Proactive Investors - Run By Investors For Investors

Is it time for AB Foods to either spin-off Primark or sell its sugar division?

Some analysts think Primark is being dragged down by AB Foods’ sugar division, which is struggling to deal with a collapse in the price of the sweet stuff
primark store
AB Foods’ bosses have never shown much interest in breaking up the group

Associated British Food PLC’s (LON:ABF) third-quarter update showed once again that it was Primark bailing out its struggling sugar business.

The FTSE 100 company has long been questioned about the possibility of spinning off its successful value fashion chain, but the answer has always been the same: being part of a larger group gives all of its businesses more financial firepower.

READ: ABF’s sugar business to offset higher Primark profits

To some extent, that makes sense: had Primark been spun out, today’s update would have almost certainly been a profit warning.

A glut of sugar has sent prices of the sweet stuff crashing, so much so that AB Foods now expects its sugar division to see a “substantial reduction” in sales and profits over the next two years at least.

Primark, on the other hand, is continuing to see sales rise even in its core UK market, where the gloomy high street trading conditions have been well documented.

Sales are up by 7% so far this year – a slight tail-off compared to earlier on in the year – with more stores opening across the UK and abroad. Primark is also in the process of an ambitious expansion into the US, which could prove to be a lucrative market if it gets it right.

Could Primark demand a higher premium on its own?

It’s the bottom line which is making real progress though. AB Foods said in today’s update that the retailer’s full-year profits would be ahead of expectations as margins continue to improve.

Primark already accounts for around 53% of group profits, but that looks set to rise again this year.

Despite the decent figures from its star asset, AB Foods shares are down 4.2% today to 2,603p, which begs the question: could Primark’s value be higher if it was hived off? IG’s chief market analyst Chris Beauchamp thinks so.

“I’m not sure why ABF hangs on to the sugar division when it continues to impair overall performance.

“Primark has demonstrated the ability to keep growing, and it would likely command a higher premium without the sugar business dragging performance.

He added: “Sugar prices are down 25% year-to-date and there’s no sign of a bounce as production continues to rise – we can expect a repeat of today’s RNS in the months to come.”

Does Costa hold the key?

While chief executive George Weston and his team have shown no interest in splitting up the company, Beauchamp reckons their minds could be changed if Whitbread PLC’s (LON:WTB) de-merger of its Costa Coffee business goes smoothly.

Whitbread, which also owns Premier Inn, came under pressure from investors who said it didn’t make sense to have a coffee shop chain and hotel group under the same roof.

“An activist investor may well push ABF down this road [as well], and if Whitbread succeeds more than a few will start to ask questions,” said Beauchamp.

View full ABF profile View Profile

Associated British Foods plc Timeline

Related Articles

cake
April 17 2018
The group's major shareholders have staunchly supported the business while the AIM-listed group sorts out its financial position

No investment advice

The information on this Site is of a general nature only. It does not take your specific needs or circumstances into consideration, so you should look at your own financial position, objectives and requirements and seek financial advice before making any financial decisions. You acknowledge and understand that neither the Company, its related bodies corporate, the information providers or their affiliates will advise you personally about the nature, potential value or suitability of any particular security, portfolio of securities, transaction, investment strategy, or other matter. You should read our FSG and any other relevant disclosure documents and if necessary seek persona advice prior to making any investment decision.

You understand and agree that no Content (as defined below) published on the Site constitutes a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable or advisable for any specific person.

You understand that in certain circumstances the Company, its related bodies corporate, the information providers or their affiliates may have received, or be entitled to receive, financial or other consideration in connection with promoting, and providing information about, certain entities on the Site and in communications otherwise provided to you.

You understand that price and other data is supplied by sources believed to be reliable, that the calculations herein are made using such data, and that neither such data nor such calculations are guaranteed by these sources, the Company, the information providers or any other person or entity, and may not be complete or accurate. From time to time, reference may be made in our marketing materials to prior articles and opinions we have published. These references may be selective, may reference only a portion of an article or recommendation, and are likely not to be current. As markets change continuously, previously published information and data may not be current and should not be relied upon.

Before you act on any general advice we provide, please consider whether it is appropriate for your personal circumstances.

© Proactive Investors 2018

Proactive Investors Australia PTY LTD ACN:132787654 ABN:19132787654.

Market Indices, Commodities and Regulatory News Headlines copyright © Morningstar. Data delayed 15 minutes unless otherwise indicated. Terms of use