A structural review by the Associated British Foods PLC (LSE:ABF) board, announced alongside final results, was welcomed by analysts but less so by investors, with the shares dropping over 2% to 2,230p by lunchtime on Tuesday.
The review is to examine whether to split its Primark retail and Foods businesses into separate companies.
Barclays hailed the (potential) major strategic shif, saying that while there are hurdles ahead, this is "a landmark first step", after years of maintaining a diversified conglomerate model that helped the group weather crises such as the pandemic.
Historically, management had leaned on the benefits of diversification in 'black swan' events, such as in 2020, when the cash-generative food division supported Primark through enforced store closures.
But times have changed.
With Primark now a large-scale international retailer that "makes sense" as a standalone company, and Foods is still seen as undervalued in the market, Barclays said.
AB Foods has confirmed it is considering separating the two into standalone listed entities, with a period of shareholder consultation which will allow management to consult with all stakeholders including shareholders, led by the majority owning Weston family's Wittington Investments vehicle.
The benefit of the board being explicit now, "is that it can scrutinize fully the new possible structure in the open allowing management to fully think through the full consequences of such a move, including, but not limited to the tax, legal and possible dis-synergies", Barclays said.
"It is not a given that the end result will be a split, but there must now be a good chance this is the end game, not least because we would expect the majority of ABF's shareholders to be supportive."
Management "clearly believes there is a much better underlying story in Foods than it is being given credit for".
Analysts saw the key sentences in the statement being from CEO George Weston, who said: "Our unique and exceptional Food business has historically been less well understood by the financial markets than Primark, yet it has a highly attractive portfolio, deep global expertise and much potential."
Barclays, which sees valuation upside if the market is allowed to price Primark independently, raised its price target for AB Foods shares to 2,500p from 2,150p.
UBS noted that Wittington remains committed to maintaining majority ownership of both businesses.
"A potential separation could take time but in our view, a sharper focus on each business likely improves long-term financial performance and value creation over time.
"In anticipation of this, we expect investors to receive this positively, narrowing any conglomerate discount."
UBS also raised its target price to 2,540p but retained its 'neutral' rating.
Panmure Liberum said the review was a surprise in today’s results release.
"We note that the group’s valuation always reflected a conglomerate discount (we assumed 10% in our valuation)," the broker added.
"The food businesses are not very well understood as the focus has always been on Primark, and Primark trades on a significant implied discount to other listed fashion retail peers.
"The separation of the businesses could help unlock some of this value and should be taken positively today."