Associated British Foods’ (ABF) first-half revenue fell by 2% to £9.5bn, ignoring exchange rate impacts. Primark revenue grew by 2% to £4.7bn, with growth being driven by new store openings. Grocery revenue was flat, while all other divisions posted declines.
Underlying operating profit fell by 18% to £0.7bn, reflecting declines across all divisions.
Free cash flow improved from £27mn to £71mn, helped by inventory reductions at Primark. Net debt rose from £2.8bn to £3.0bn.
Following a previous downgrade to guidance, ABF still expects underlying operating profit to fall below last year’s level of £1.7bn. The outlook for Sugar has deteriorated, with the division now expected to post a full-year loss.
The interim dividend of 20.7p per share was unchanged.
ABF confirmed its intention to spin out Primark from the business by the end of 2027.
The shares fell 4.8% in early trading.
Our view
Associated British Foods (ABF) profitability continued to come under pressure over the first half. While momentum’s expected to improve in the second half, it won’t be enough to stop full-year profits falling below last year’s level. There’s also a shake-up on the cards, and Primark is set to be spun out from the rest of its food businesses.
In the UK, Primark’s sales are holding up well, thanks to recent investments and a focus on affordable fashion, which is driving market share gains. However, the investment alongside higher levels of discounting has weighed on margins, and its mature store estate means growth opportunities on home soil are limited.
Overseas expansion is a big part of the game plan, with new stores to contribute around 4-5% in annual sales growth for the foreseeable future. But the outlook abroad has deteriorated recently, with European customers becoming more cautious with their spending.
In a bid to improve overseas performance, management’s pressing ahead with new initiatives abroad that have brought prior success in the UK. We’re cautiously optimistic that things will turn around here, but there’s room for things to get worse before they get better in our view.
Primark's not the only show in town though - ABF is home to an eclectic mix of food and commodity businesses. Performance here has been underwhelming of late, with the profit outlook deteriorating across the board.
Given the structural differences between its fashion and food businesses, we were pleased to hear that ABF is moving ahead with plans to spin out Primark. It should help sharpen management’s focus and unlock long-term shareholder value. However, it could be late 2027 before the move completes, so underlying business performance will be the key driver of sentiment in the near term.
ABF is managing the direct impacts of the Middle East crisis well, and hedging arrangements mean that higher energy and freight costs in 2026 should be manageable. But the indirect impact on consumer demand remains unknown and will likely depend on the conflict’s duration.
Despite a rise in net debt levels, the balance sheet remains in decent shape and should help the group weather the storm. This also means there's room to return excess cash to shareholders through ongoing share buybacks, though nothing is guaranteed.
Most of ABF’s businesses are currently suffering from weak end-markets. This has seen the valuation fall well below its long-run average, which now looks undemanding to us. If it completes, the spin-off would enable investment in Primark as a standalone business, which we view as the group’s strongest asset. However, profitability across the group looks set to remain under pressure in the near term, so potential investors need plenty of patience.
Environmental, social and governance (ESG) risk
The retail industry is low/medium in terms of ESG risk but varies by subsector. Online retailers are the most exposed, as are companies based in the Asia-Pacific region. The growing demand for transparency and accountability means human rights and environmental risks within supply chains have become a key risk driver. The quality and safety of products as well as their impact on society and the environment are also important considerations.
According to Sustainalytics, Associated British Foods’ management of ESG risk is strong.
ABF has a comprehensive environmental policy and global supplier code of conduct. Although priorities appear to be set at a group level, each business division has its own approach, resulting in certain businesses reporting more comprehensive sustainability efforts than others.
Associated British Foods key facts
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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by LSEG. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
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