AB Foods is exploring separating its food business from Primark to maximise shareholder value amid falling sales and profits.
The group said it was reviewing its structure alongside the release of final results that showed operating profit fell 23% as revenues declined 1%.
AB Foods’ solution to this problem appears to be to break up the group to unlock value in the clothing and food as separate entities.
“Associated British Foods’ results were a touch soft, but news of a potential spin-off of its beloved Primark and Food businesses grabbed headlines on the day,” said Aarin Chiekrie, equity analyst, Hargreaves Lansdown.
“In the UK, Ireland and Europe, Primark’s like-for-like sales declined over the year, despite the favourable summer weather. Instead, growth was driven by its store rollout programme, with a particularly strong performance in the US, helping total Primark sales edge 1% higher over the year.
“At a time when many other large physical retailers are closing their doors, Primark expects new stores to contribute around 4-5% in annual sales growth for the foreseeable future.”
Primark has long been the core of AB Foods’ strength, and it has always seemed a little strange that it sits within a group otherwise focused on food.
As growth slows across the group, pressure is mounting to recognise the value of Primark, and the most obvious way to do so would be to allow it to operate as a separate entity.
One would think that Primark would be well-received by US markets, and it’s not inconceivable that it would trade at a significantly higher multiple than the UK market assigns.
Garry White, Chief Investment Commentator at Charles Stanley, explained that Primark’s strong brand and steady growth rate would help achieve that higher valuation.
“Primark generates roughly half of ABF’s revenue and more than 50% of group profits, making it the company’s key growth driver,” Garry White said.
“As a standalone entity, Primark would likely command a higher valuation thanks to its strong brand, international expansion – particularly in the US – and resilient margins.
“Some even suggest that a separate Primark could be worth more than ABF’s current market capitalisation, and there is merit to that view. ABF’s conglomerate structure arguably dilutes Primark’s retail premium, as weaker divisions such as sugar and ingredients drag on group margins.”