Associated British Foods (LON: ABF) - Full thesis
Primark alone may already be worth the entire group market cap. Everything else, Grocery, Ingredients, Sugar and Agriculture, comes free
5 minute drill
The British holding company Associated British Foods conceals one of the fastest-growing fashion retailers in the world. Primark, with its fast-fashion model built on low costs and commercial licensing deals with brands such as Disney, has expanded aggressively across Europe, doubling its retail footprint over the past decade to reach 473 stores across 17 countries.
Still controlled by its founding family, the holding operates four additional divisions across the food chain:
Grocery: a consumer staples business with strong brand recognition, operating primarily across Commonwealth markets.
Ingredients: a specialty chemicals platform and one of the world’s largest producers of yeast and bakery ingredients.
Sugar and Agriculture: two businesses exposed to commodity cycles, currently navigating overcapacity, margin pressure, and restructuring costs, which the market has largely written off.
Management, after years of market pressure and persistent speculation, has decided to spin off Primark from the remaining food divisions, to be referred to as FoodCo. The transaction is expected to be completed by end of 2027.
Primark, which represents 49% of group revenues, generates approximately £1.1bn in EBIT against a group market cap of £13bn. For context, H&M trades at £21bn with £1.4bn in EBIT. The arithmetic implies that the market is ascribing close to zero value to the remaining divisions, despite the group carrying virtually no debt, a defensive and well-margined Grocery business (21% of sales), and Ingredients (10% of sales), a specialty chemicals operation with meaningful barriers to entry.
The market is rarely irrational without reason:
Primark faces a difficult consumer sentiment backdrop across its core markets and growing competition from online players such as Shein, whose pricing is structurally aggressive. The result has been two consecutive years of like-for-like sales declines, even as organic growth from new store openings has kept total revenues moving. This casts doubt over the most important growth vector for Primark: the United States, where its expansion is only just beginning.
The FoodCo divisions face their own headwinds: Sugar is navigating a deeply negative point in the capital cycle, with capacity being actively destroyed across Europe, Groceries is improving its portfolio so as not to lose margins while rest of divisions face restructuring costs.
Then: The spin-off of Primark will expose a valuation gap that is hard to ignore. Pricing Primark at H&M multiples, a competitor that is not growing, already justifies the entirety of ABF’s current market cap. Adding Grocery and Ingredients, two solid businesses with no debt, and deducting corporate costs, the undervaluation reaches 50% upside on a post-spin basis. The upside optionality comes from two sources:
The US market, where a conservative scenario puts Primark’s addressable opportunity at £5bn in sales, representing 56% of its current total and requiring roughly ten times its current store count.
The re-rating of Grocery, a business comparable in margin quality and capital returns to Danone, and Ingredients, both running virtually debt-free and currently priced at zero by the market.
What is Primark worth as a standalone?
And what does that leave for everything else?
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