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.
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.