Shares in Associated British Foods (LON:ABF) sank as a weak showing from its sugar division soured the profit outlook for the foods-to-fashion conglomerate. The sugar division’s struggles overshadowed a resilient Q3 performance from ABF’s cut-price clothing chain Primark, which benefited from June’s hot weather.
Associated British Foods is preparing to spin off Primark before the end of 2027. This radical move will break up one of the UK’s biggest consumer businesses.
Sugar ain’t so sweet
In a Q3 update, Associated British Foods warned pressure from soaring gas prices will hit its sugar business next year.
‘In sugar, the duration and severity of the Middle East conflict have increased gas price expectations for next year, which has impacted our European profit outlook,’ explained CEO George Weston. ‘Aside from sugar, our full year outlook for the group is unchanged.’
Lower selling prices in Europe sent Q3 sugar sales down 4%. For FY26, ABF now expects sugar losses in the £25 million to £60 million range. Losses for the division in FY27 are expected to deteriorate further.
Primark shows resilience
Despite a ‘challenging consumer environment’ across most of its markets, Primark’s sales grew 3% in Q3. New stores contributed to growth, although like-for-like sales were down 2.2%.
Primark gained UK market share, suggesting its value proposition still has cut-through with cash-strapped shoppers. A strong start to spring/summer trading in March was followed by weaker trading in April and May, largely due to the impact of the Middle East conflict on consumer sentiment. But improved weather in June boosted sales.
Disappointingly, Primark’s like-for-like sales dipped in continental Europe, where consumer confidence remains weak. Trading in the US continued to prove ‘mixed’, but this vast market should be a source of strong long-term growth for Primark.
Good growth from Twinings
Turning to the grocery brands, Twinings delivered ‘good growth’ in the US, UK and Australia, driven by ‘strong demand for wellness teas’. Ovaltine continued to recover from last year’s disruption caused by cocoa-related price increases.
ABF also welcomed the recent decision by the UK Competition and Markets Authority (CMA) to approve its acquisition of Hovis. ‘By combining the production and distribution activities of Allied Bakeries and Hovis, we expect to drive significant cost synergies to invest in product innovation and create a sustainably profitable bakeries business’, said ABF.
ABF has long suffered from a ‘conglomerate discount’. As such, there is logic in separating the retail and food businesses. But as the Q3 results demonstrate, the timing of the demerger is less than ideal.
Following the split, Primark and the remaining Associated British Foods will both be listed on the FTSE 100. Primark has grown to a size where it requires laser focus to capitalise on its own growth prospects in overseas markets. Through the demerger, Primark will also rid itself of the commodity and energy pressures impacting its food businesses.
On the negative side of the ledger, Primark will no longer benefit from the dependable cash generation of the broader group. Currently, the discount fashion chain is struggling to generate like-for-like sales growth in an ultra-competitive environment. And the hard-pressed sugar arm is an obvious vulnerability for the remaining food business.
Read the press release here: https://www.abf.co.uk/investors
