- Primark to be spun out from Associated British Foods (ABF) as a separately listed company by the end of 2027
- The retailer might be afforded a higher valuation as a standalone business and could grab a place in the FTSE 100
- ABF shareholder base set to evolve following the demerger
Dan Coatsworth, head of markets at AJ Bell, comments:
“Primark is to demerge from parent group Associated British Foods (ABF) and become a standalone listed business by the end of 2027. ABF shareholders will get shares in Primark as part of the process, and both the parent and the retail spin-off are expected to be members of the FTSE 100 index.
“For years, ABF said it would never split Primark from the group, arguing that a conglomerate structure provided added benefits. To some extent that is true, as evidenced by ABF regularly having one of its many component parts fall behind and the rest of the group picking up the slack. However, the bigger Primark has got, the stronger the call to let it stand on its own. ABF has finally buckled and pressed the button on the demerger.
“The type of investor who wants to own shares in a food products and ingredients business is not necessarily the same as one seeking exposure to the retail sector.
“When the corporate split happens, it’s likely we will see a shift in the shareholder register as some existing ABF investors choose sides. Some might prefer to focus on the food operations, while others will pledge their allegiance to retail. That said, there is often inertia by investors, and they may be happy to hold both.
“There is the potential for Primark to trade on a higher valuation as a standalone listed business. ABF currently trades on 10.7 times next 12 months’ expected earnings. Conglomerates often trade at a discount to reflect a sprawling empire of interests. In contrast, British retail giant Next trades on 16.8 times forward earnings – a much higher rating versus ABF. There is no guarantee that Primark would trade on a comparative rating, but it is fair to suggest it could warrant a much higher valuation than is currently attributed under the ABF umbrella.
“Primark is one of the biggest retail success stories of the past two decades. It has shown the future of retail is not dependent on the internet, with physical stores still a solid way to make money. Its secret sauce is a mixture of attractively priced products, good stock levels, large stores, and an eye on the latest fashion. Primark’s products are relevant and affordable, and the company has shown it can make money on low margin items by running the business efficiently and with a close eye on costs.
“Demerging from a conglomerate parent could lead to faster decision making and freedom to explore new growth opportunities. That could involve expanding into new countries or adding smaller stores in high footfall locations that only stock the most popular items.
“Primark is currently experiencing a few bumps in the road amid tougher market conditions. A prolonged Middle East conflict could exacerbate the situation if the oil price stays higher for longer, leading to cost pressures for Primark and weighing on consumer sentiment. While that suggests uncertainty ahead, investors looking at the demerger will be judging Primark on its long-term growth potential, not the next few months.”
