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In the FTSE 100, the Associated British Foods (LSE: ABF) share price is in the spotlight today (4 November), after the company announced it may split Primark and Food into two separate businesses. So, could this be the tonic that unlocks long-term shareholder value?
The results
The headline number from ABF’s FY25 results was a 13% drop in operating profit to £1.7bn, mainly due to a collapse in sugar prices. This sent the sugar division into loss-making territory. As a result, free cash flow more than halved to £648m, highlighting the impact on the group’s cash generation.
In Retail, operating profit rose 2% to £1.1bn, supported by 1% sales growth thanks to new store openings. But the headline masks some underlying weakness.
In the UK, which accounts for 45% of retail sales, like-for-like sales fell 3.1%. The cost-of-living crisis continues to weigh on consumer spending. However, there were signs of improvement in H2, particularly in womenswear.
The grocery division saw adjusted operating profit fall 4% at constant currency, despite strong growth from international brands Twinings and Ovaltine.
In the UK, Allied Bakeries experienced lower sales and a widening operating loss. The company is hoping that the takeover of rival Hovis will support a recovery.
Primark split?
In a major development, ABF has announced a review of its group structure, considering splitting Primark and its Food business into two separate companies. While no decision has been made yet, I believe such a bold move could be a game-changer for long-term shareholder value.
Both divisions are strong but have different dynamics. Primark has an internationally recognised brand, strong customer proposition, and significant growth opportunities. This is evident through continued new store openings and expansion into new markets.
The food business, by contrast, has historically been less understood by the financial markets, despite its highly attractive portfolio, deep global expertise, and long-term potential. The review could help unlock that value by providing clearer visibility for investors.
Importantly, any split would see Wittington Investments, ABF’s largest shareholder, maintain majority ownership of both businesses. For me, the family-run nature of the business remains a major attraction, even in the event of structural changes.
Risks
The short-term risks for the ABF share price are mounting. Primark’s growth is largely driven by new store openings rather than underlying consumer demand. With the cost of living crisis ongoing, there is little relief in sight for UK shoppers.
The sugar business faces continued pressure from weak prices. Following a failed attempt to secure government support, the company has decided to close its Vivergo bioethanol plant. This has resulted in an impairment charge of £161m, of which £32m is cash costs.
In addition, closure costs of £30m, including £26m in cash, will continue to put pressure on future free cash flow.
Bottom line
Despite short-term pressures, I remain positive on ABF. The group’s strong fundamentals, cash generation, and growth initiatives provide a solid base.
I view the potential split of Primark and Food as a catalyst that could unlock significant long-term shareholder value, giving each business clearer visibility and allowing investors to better appreciate their individual strengths.
As an existing shareholder, I am adopting a wait-and-see approach on any final decision before committing additional capital. But I continue to view the long-term stock’s prospects with optimism.
