Despite my negative view on food and beverage stocks, I have not given up. Associated British Foods, or ABF in brief, appears to offer one of the better setups on the menu. The maker of Twinings Tea is still family-controlled and it has a clean balance sheet. These two points alone dramatically differentiate it from other troubled competitors. However, ABF itself isn’t free of challenges either. Its “defensive” stock last week collapsed after a disappointing trading update. In this weekly, I take a look at ABF, as there’s a potential catalyst on the horizon. Good news for all my paid-members: I’ve finally found a food stock checking my boxes. My first member eggs-clusive research report for 2026 is out of the cage.

Summary and key takeaways from today’s Weekly
– Associated British Foods, or ABF in short, on the surface looks like a more promising stock.
– However, despite its name, the company is more a clothing retailer than a food producer.
– The stock is a pass for now, but an interesting catalyst might be on the horizon, making ABF a candidate for the watchlist.

While I am happy to have operated successfully against the mainstream herd and their “safe and defensive” consumer stocks mantra, something was clearly missing.

My members did receive last summer a truly defensive consumer stock idea from me, but the company is focussed on household cleaning products.

The pick so far has performed very well. That’s not the point.

However, so far I have not presented any food or beverage stock that in my view might be worth a look. Most names are coping with the same set of problems and challenges I have written about on many occasions: mature markets, eroding brand and pricing power, the birth-rate collapse, over-levered balance sheets, wrong priorities (dividends), still not dirt-cheap stocks.

Associated British Foods (ISIN: GB0006731235, ticker: ABF), or ABF as it also known, is a company I have been watching for quite some time. Despite a much better setup with less pronounced negative factors, something was missing all the time. The stock for me was too expensive with too little upside in my view, and I had doubts about the sustainability of its growth.

I was correct. ABF stock collapsed last week after it gave an ugly trading update.

So much on pretend defensive stocks not being volatile. Nonetheless, or maybe because of the drop, I am having a look at it now. There is a catalyst on the horizon.

All my paid-members have received my latest stock idea, yesterday. I don’t know whether it will be the golden egg, but this food producer comes with a setup that is hard to ignore. See the preview of my latest research report below — and join as a Premium member to uncover this egg-citing setup before others do.

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A look at the Twinings Tea maker

Before we dive into the stock, first a small correction and clarification.

The name Associated British Foods suggests that it is a food producer. And indeed, its portfolio (see here and here) consists of different consumables like Twinings tea, ready-to-eat bakery products, cooking and baking ingredients like yeast, oils, sauces and dressings, enzymes, pharmaceutical ingredients, sugar, and even an agricultural business.

ABF’s roots trace back to the 1930s, when it indeed started as an allied bakery business. Over time, the Britain-focussed portfolio was expanded and the company also grew internationally. With plans to further diversify beyond baking and milling, Allied Bakeries became Associated British Foods. In 1964, the famous tea brand Twinings was acquired.

However, the biggest segment by sales and especially operating profit, as well as the growth engine, is Retail. Primark, the low-price clothing retailer was founded in 1969 with the help of ABF’s capital (it was not acquired).

Today, it is the biggest pillar of ABF — that’s why the company’s name is a bit confusing.

Primark generated almost half of ABF’s total sales in the last fiscal year.

Not only that, it was the only segment that posted a positive growth figure, even though a slim one. While many of its consumable products are premium brands — Twinings always comes to my mind first — the retail segment is focussed on bargain hunters, who are highly active in the current environment.

The first three segments, Retail, Grocery, and Ingredients, all have operating margins of around 11–12%. Primark / Retail, however, due to its size, generated 63% of all operating profit, making ABF more a clothing retailer than a food business.

The remaining two segments, Sugar and Agriculture, are both more cyclical due to commodity price exposure, and sort of more troubled areas inside this conglomerate. The loss-making bio fuel segment made some headlines. ABF called for subsidies to rescue this segment, but calls were unheard and the plant was closed last year (see here).

It is a complex company.

ABF as a whole over the last decade was not known to be a growth machine.

The profile was more the one of a solid, but steady grower with low single-digit rates. Sales in total grew by about 50%, measured by eye, over this period.

Operating income more or less followed suit. Operating margins roughly cycle around the 8% mark, with a modest upwards tendency. However, in the last fiscal year, they dropped considerably from 9.5% to 8.5% again.

Cash flow is a bit tricky.

Due to IFRS requirements, leasing (principal and interest payments) is subtracted very late in the cash flow statement, making operating and free cash flow looking higher than they are.

That’s why we need to adjust a bit which I am going to do later in the valuation part.

For now, here is the unadjusted free cash flow, showing an uneven and lumpy trajectory. The most recent results showed a high number in comparison to older results, and only the third time ABF generated more than a billion GBP in FCF (before leasing).

No that bad, but result dropped compared to FY 2024.

And it does not look better.

ABF last week released an early trading update that has sent the stock lower in the double digits. Operating performance was unconvincing and the guidance was lowered. It was practically a profit warning, as the real trading update with more details is scheduled for next week.

In essence, Primark, the most important segment, surprised negatively. With what the CEO described as a “challenging start to the financial year”, investors were caught by surprise.

So, more negative growth and earnings pressure should be planned with.

ABF said Primark sales were up by ~1%, but that was driven by new space. Like-for-like sales declined 2.7%. Heavy markdowns further impacted profitability, so that full-year Primark margin guidance was lowered now to ~10%, if current trends persist. The UK showed relative strength with market share gains from value-focused initiatives, but Continental Europe and the US faced tough consumer environments.

If consumers even skip Primark, you know what you need to know about the economy.

The food businesses were mixed with US weakness leading to lower full-year profit expectations for Grocery and Ingredients.

Group adjusted operating profit and EPS are now seen “below last year”.

ABF stock dropped sharply to one of its lowest levels over the last twelve months.

Over the long-term, we can see ABF has not shown a convincing performance either. The all-time high was set in late 2015.

Currently, the stock is trading at around half that level only, despite a 10% lower share count. And it is not due to a fragile, over-levered balance sheet. Far from it, as ABF has had a modest net cash position all the time, when factoring out leases (which I do not view as financial debt, but business expenses).

In my view, two things were responsible for this weak performance: Complexity and simply a too ambitious valuation. The latter can be explained by viewing ABF more as a growing retailer through Primark. But this story has fallen asleep now.

Accordingly, valuation multiples contracted. EV / sales fell below 1x. This chart shows EV including leasing as debt. Clearly not expensive.

For both, the retail and the food business combined.

Assuming a net earnings margin of 5% (last FY saw 5.3%), the implied earnings multiple would be 10–12x. Sounds fair.

And this is my main issue — it is likely only fair.

Especially, if ABF were to see falling sales and earnings, even this “low” valuation could prove to be too expensive still. In other words, the margin of safety is thin, making this case dependent on a return to growth, even if only modest.

But that’s not certain in the current environment.

Regarding free cash flow, here is the latest full cash flow statement. Operating cash flow was 2.2 billion GBP in the last FY, sharply lower compared to the year before. The main driver were inventory movements that this time negatively affected cash flow (inventory buildup).

Investments into property, plant and equipment, but also intangibles accounted for 1.2 billion GBP. In the bottom section, we have leasing-related cash outflows of another almost half a billion GBP.

Accordingly, my calculated free cash flow for the last FY is only about 500 million GBP.

This is not that much.

The market cap currently is 13 billion GBP, so that based on FCF, the multiple is even strongly north of 20x. Definitely too much for my taste.

But I promised there’s a catalyst on the horizon.

In the FY 2025 results release, for the first time, management talked about a potential separation of the retail and food businesses. No decision has been made back then, but this step is being reviewed.

The current early trading update, respectively the conference call, confirmed the evaluation is ongoing. We will need to wait until a final decision will be announced.

A separation would clearly solve the complexity issue with (at least) two business segments, that have little to nothing in common. It is only a logical and consequential step in my opinion. Thus, I am supportive of this process.

Both businesses would likely be valued differently and potentially higher each than together combined inside a structure that does not seem to fit together. Thanks to the clean balance sheet, both could have a good start.

This is what I am currently waiting and looking for.

Until then, ABF is put on the watchlist.

Conclusion

Associated British Foods, or ABF in short, on the surface looks like a more promising stock.

However, despite its name, the company is more a clothing retailer than a food producer.

The stock is a pass for now, but an interesting catalyst might be on the horizon, making ABF a candidate for the watchlist.

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