Associated British Foods (LSE: ABF) shares have been losing ground due to a number of uncertainties surrounding the company. But on Tuesday (21 April), investors got confirmation of the news many of us have been hoping for.
Along with first-half results, the company had this to say: “ABF has announced today that following an in-depth review … the Board of ABF has decided to proceed with a demerger of its retail business (“Primark”) from its food business“.
Following the split, shareholders will own shares of the two separate listed companies. And to me, that has to be a good thing.
Hello ‘new Primark’
Maybe a retail investor likes the look of Primark — which has very much been the jewel in its crown over the longer term. But why would they want to own part of a yeast and bakery ingredients business? Or sugar, or agricultural products? And it works the other way round. ABF’s foods business is quite nicely diversified, but isn’t including cheap undies and shirts going a bit far?
Unfortunately though, the market isn’t responding as enthusiastically as me. As I write, ABF shares are hovering around 4.5% down on the day.
But then, a 17% drop in adjusted operating profit alongside adjusted earnings per share falling 15% can do that. At least the interim dividend is unchanged at 20.7p per share — with a forecast 3.3% yield.
Profit pressure
We shouldn’t be too surprised, not after the company issued a profit warning back in January. And CEO George Weston this time opened with: “We knew the first half of this financial year was going to be challenging and that’s borne out in our financial results.”
Star asset Primark has been struggling under the same pressures as the rest of the retail sector. But Weston added: “Primark continued to make strong progress in re-energising its customer proposition in a difficult clothing market. Our actions in the UK since the autumn drove like-for-like sales growth and market share gains.“
There’s an extra warning on top of the January one however, and I think we all know which part of the world it involves. He added: “We are managing the impacts of the Middle East conflict. Given what we know today, we expect the cost consequences in 2026 to be manageable. However, there is a risk to Primark sales if the conflict persists and consumer spending deteriorates.“
Tricky choice
Those who’ve been keenly watching Associated British Foods now face a decision. Consider buying ABF shares today, and then sell the part we might not want later? Until the demerger, I can easily see more share price weakness, so the price might be right if we take that route. But if we wait until the deed’s done, might that immediately push the individual share prices up?
I’ll wait, and I’ll consider Primark after the split — the CEO did say he expects improvement in the second half. And despite the clear economic danger, I think investors could do well to consider it too. The new food business? I’ve no idea, as I’ve never been interested in it.
