Associated British Foods plc (ABF) Ordinary 5,15/22p Shares

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Associated British Foods (ABF) reported full-year revenue of £19.5bn, down by 1% ignoring exchange rate impacts. A 1% increase in Primark sales was more than offset by a double-digit decline in the sugar division due to low prices across Europe.

Underlying operating profits fell by 12% to £1.7bn, with the decline largely driven by the sugar division turning loss-making.

Free cash flow more than halved to £648mn. Net debt rose from £2.0bn to £2.6bn.

In 2026, ABF expects to deliver underlying operating profit growth at the group level. A review of the group structure is underway, with the potential separation of Primark from its Food businesses being considered.

Total dividends were down 30% to 63p per share. A new £250mn share buyback programme was announced.

The shares were up 2.1% in early trading.

Our view

Associated British Foods’ (ABF) profits fell sharply last year due to the previously announced weakness in European sugar prices. But news that it might spin off Primark from the rest of the Food businesses excited markets on the day.

Primark's focus on affordable fashion is helping to expand its share of a challenging UK market. However, its mature store estate means growth opportunities are limited. But overseas expansion is a big part of the game plan, and strong momentum, especially in the US, is helping to offset declines on home soil. Primark expects new stores to contribute around 4-5% in annual sales growth for the foreseeable future.

Geopolitical tensions remain fragile, and any escalation could have knock-on effects on global supply chains. Despite a growing footprint across the pond, the US remains a small slice of total revenue at around 9%. With half of these sales being produced in the US, ABF’s exposure to tariffs is limited.

Primark's not the only show in town though. ABF is home to an eclectic mix of food and commodity businesses, which helps to spread risk so that the company isn't overly reliant on any one division. But bear in mind, sugar and other commodity prices are cyclical and will fluctuate over time.

That’s exactly what we’re seeing unfold. A steep drop in European sugar prices cut sugar profits by around £215mn last year, turning the division loss-making. Given the cyclical nature of its food businesses, a spin-off of Primark is being considered. No decision has been made yet, but we support the potential move as a way to sharpen management’s focus and unlock shareholder value.

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 share buybacks. But as always, shareholder returns are never guaranteed.

All in, ABF is a collection of great businesses. Primark has attractive growth opportunities abroad, but the outlook for the sugar division could get worse before it gets better. With ABF’s valuation sitting well below the long-term average, it offers both upside potential and some downside protection. But the potential Primark spin-off will be the key driver of sentiment in the near term, and there’s no guarantee it goes ahead.

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 average.

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.

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.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment.

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