After Associated British Foods PLC (LSE:ABF) proposed a split of Primark and Foods divisions alongside its results, Barclays analysts found there was a big debate in the City between supporters and opponents of a move.
The market in the results was on weak Primark like-for-likes, muted margins and earnings downgrades, sending the shares down well over 3%.
While a Primark/Foods split is seen as "sensible" move, the analysts found there is "a big debate as to whether there is a valuation unlock and even if there is, over what time frame".
Opinion among institutional investors is split too, with hedge funds were "more sceptical about the timing of the announcement at the time of further downgrades" and Barclays found that many hedge funds are questioning whether there is any real SOTP (sum of the parts) upside.
"Right now, the market is in an unforgiving mood for any retail businesses that keeps putting up negative LFLs and there is a real debate whether Primark should be comped against the likes of H&M, Next and Inditex who are performing better or whether H&M, Kingfisher and JD are better comps."
There was a general consensus in the City, the analysts said, that the key to the SOTP valuation unlock is "understanding what the right multiple is" for the grocery business, and to a lesser extent, the ingredients arm.
"It still feels as though investors are not yet thinking about how the valuation of the good parts of Grocery (Twinings/Ovaltine) should differ from the less good parts such as Australia or UK bread."
Long-only investors, AKA fund managers looking to buy and hold, are more supportive, seeing the split as "a meaningful step which could improve governance and capital allocation, although they also want to see better Primark LFLs and the earnings downgrade cycle trough".
Barclays noted that sell-side analyst coverage of ABF is "almost exclusively retail analysts" – of which the Barclays team says it is an exception – "so is it little wonder there is so little focus and understanding of the non Primark assets".
With negative LFLs overshadowing Primark’s strengths, until they improve, the share price may remain rangebound, Barclays said.