EUR 461.70 For Business Accounts Only

Analysis Indicates Hidden Value in Primark Split

In its current form, Associated British Foods Plc (ABF LN) suffers from an extreme dichotomy between its largely commodity-based Grocery, Agriculture, Sugar and Ingredients segments and its high-volume, low-price Retail (Primark) segment. Based on our analysis, the management has done little to maintain value creation over the past few years compared to peers and the Index, and shareholders will benefit from substantial hidden upside if Primark were to be separated from the other businesses.

What's Happening?
We examined Associated British Foods Plc (ABF LN) for potential value creation opportunities resulting from the separation of its high-volume, low-price Retail (Primark) segment. Primark (48.4% of ABF’s total revenue and 56.1% of total adjusted EBIT in FY18) remains the company's best asset with strong growth prospects. Primark is positioned as a high-volume, low-price operator, applying a hard discount model to clothing retail. In comparison, other prominent business units Sugar (11.2% of total revenue and 8.2% of total adjusted EBIT in FY18) and Grocery (22.1% of total revenue and 22.3% of total adjusted EBIT in FY18) saw -14.9% and +1.2% Y-o-Y compared to Primark’s growth of 6% Y-o-Y in FY18 revenue, respectively.

ABF’s current conglomerate structure makes Primark an entirely different business from its remaining units (largely commodity businesses, especially sugar and agriculture), and we believe the separation of Primark from the remaining company is justified given this dichotomy of focus. In recent years, agriculture had some success in moving away from commodity animal feed and accelerating growth with high value-added animal feed, like specialty products and premium nutrition, though despite this move, it remains a fragmented market with many players and low margins.

Grocery consists of mostly food and beverage brands with little pricing power. Growth rates are low in this unit, and the operating margin is significantly lower (9.7%) than for large fast-moving consumer goods companies, signifying weaker intangible brand value. The Ingredient segment enjoys a strong market share in yeast and there is good growth in the enzyme business, which also has high margins. But the Ingredient segment comprises only ~10% of ABF’s total revenue and adjusted segment EBIT in FY18, and therefore does not create much economic moat for the company. Falling sugar prices are putting pressure on profits in the Sugar business.

The Edge View...
Primark is the epicenter of growth at ABF, but its actual value is not achieved in ABF’s current share price due to the weak fundamentals of the other businesses. Therefore, we believe Primark’s separation (either through its full or partial Spinoff or sale of other businesses like Sugar and Agriculture) will lead to value creation opportunities for investors. We believe the founding family (holding a 51% stake) will also benefit from the potential upside in in the case of a Spinoff as they will continue to be a majority shareholder in Primark (based on distribution ratio).