Interim results from Associated British Foods PLC (LSE:ABF) sent the shares down over 8% and revived speculation about how much longer the conglomerate can keep two "odd bedfellows" of Primark and its British Sugar businesses together.
Group sales fell by 2% year-on-year in the first half, while profit before tax dropped by 21% as the Sugar division was hit by a sharp fall in European market prices, which drove a swing of around £140 million in underlying operating profit.
The outlook was lowered for the full year, solely due to the issues with Sugar and the Vivergo bioethanol business, though the key Primark business also put in a mixed performance, with a 6% increase to £540 million in adjusted operating profit, despite a 2.5% drop in like-for-like sales.
A review has been launched by management into Spain Sugar/Vivergo/Allied Bakeries.
Clive Black at Shore Capital said the results left a "bitter taste," leading his team to put their 'buy' rating under review.
"The stars have not quite been aligned for ABF in the past year," he added, noting that today's downgrade would likely weigh heavily on sentiment.
Chris Beauchamp, chief market analyst at IG, said: "ABF’s figures have been marred by poor performance in its sugar unit, which will revive some speculation about how long the conglomerate will keep these two odd bedfellows."
He noted that as Primark grows, calls for a spin-off of the retail division are likely to get louder.
Russ Mould, head of investment at AJ Bell, said "ABF's conglomerate model and the diversification it brings was a boon during the pandemic but it has now tripped the company".
Primark sales, Black argued, often "over-dominate" ABF's investment thesis, "to the exclusion, good and bad, of the rest of the firm" – though today was an exception, which he called "an unfortunate narrative".
He acknowledged the "mature and, at times, now underperforming nature of Primark in the UK" but highlighted that Primark UK is highly profitable, with above average divisional margins and very cash generative, "helped by a determination not to over-expand, and also the test bed for the evolving digit capabilities of the firm, where last mover advantage is somewhat evident".
Mould also flagged additional concerns at Primark, despite strong weather conditions that should have boosted trading.
"Primark seems to be underperforming its peer group of late," Mould said, warning that management will need to act fast to arrest any loss of market share, which was reduced from 6.9% to 6.7% in the first half .
The recent leadership vacuum at Primark, following the departure of its longstanding CEO, adds another layer of uncertainty, he added.
Black seemed to agree, saying that the retailer was "embracing rather disappointing leadership change".
Group finance chief Eoin Tonge is currently acting as interim divisional CEO.
"The chain badly needs someone permanent to provide it with direction for the future," said Mould.