Morgan Stanley upgrades AB Foods to 'overweight'

Michele Maatouk Sharecast | 13 Feb, 2017 09:20 | | |

ep primark palma mallorca
  • 2,973.00
  • 0.51%15.00
  • Max: 2,981.00
  • Min: 2,944.00
  • Volume: 779,658
  • MM 200 : n/a
17:19 28/06/17
  • 7,387.80
  • -0.63%-46.56
  • Max: 7,445.31
  • Min: 7,381.36
  • Volume: 0
  • MM 200 : n/a
17:18 28/06/17
  • 1,519.05
  • -0.01%-0.08
  • Max: 1,521.87
  • Min: 1,503.96
  • Volume: 0
  • MM 200 : n/a
17:19 28/06/17
  • 8,512.75
  • -0.12%-9.91
  • Max: 8,551.40
  • Min: 8,457.22
  • Volume: 0
  • MM 200 : n/a
17:18 28/06/17
  • 4,094.42
  • -0.56%-23.19
  • Max: 4,121.58
  • Min: 4,088.51
  • Volume: 0
  • MM 200 : n/a
17:18 28/06/17
  • 4,039.30
  • -0.57%-23.15
  • Max: 4,065.84
  • Min: 4,034.36
  • Volume: 0
  • MM 200 : n/a
17:18 28/06/17

Morgan Stanley has upgraded Associated British Foods to ‘overweight’ from ‘equalweight’ and lifted the price target to 2,800p from 2,650p.

Although the bank has not materially changed its valuation for Primark, of about £15bn, it has increased its valuation for the sugar business to reflect improving prospects. This leads to the target price increase and with 12% implied upside potential, the bank has upped its rating on the stock.

MS said the share price drop of around 30% in the last 10 months was overdone. It noted the shares have fallen despite consensus earnings forecasts marginally increasing.

“Primark remains an excellent long-term international growth story and its margin problems are temporary, in our view. We think it very plausible that its profits could grow by more than 40% next year.”

MS said investors have become too focused on Primark’s like-for-like sales. It said although sales have slowed, it remains a very healthy business.

“Even without any online sales, its sales densities are 25% higher than those of Inditex and double those of H&M. And, unlike H&M, its densities aren't declining over time, so we don’t see it at risk of operating deleverage.”

MS said that if Primark continues to grow sales by 10% a year and its margins in FY 2017/18 recover to the same level as FY 2015/16, “it is a matter of simple mathematics” that its profits will grow more than 40% next year.

“We don’t factor this degree of margin recovery into our base case forecasts yet, but we think it a plausible scenario (something very similar happened in FY 2012/13). And if it does happen, Primark's implied valuation multiples would suddenly look very low indeed.”

At 0918 GMT, AB Foods shares were up 1% to 2,524.00p.

More news

20:09 Prime London areas face significant house price drops

Average prices in London's most luxurious districts continue to slip lower as increased economic and political uncertainty takes its toll, according to research from broker Savills.

18:59 US open: Wall Street gains as dollar slips, banks rise

Gains for banks and commodity-related issues saw Wall Street bounce back from recent weakness despite mixed reports on the economy.

18:34 FX round-up: Sterling gets a shove higher as Carney sees potential for rate rise

Sterling got a firm shove higher on Wednesday as Bank of England governor Mark Carney suddenly declared UK interest rates might need to be hiked.

18:32 Europe close: Stocks close well off lows despite FX volatility

A strong start to the day on Wall Street buoyed European stocks, offsetting the impact of a stronger euro and the somewhat contradictory headlines swirling around the European Central Bank and Bank of England.

18:11 Results round-up

Electronics retail group Dixons Carphone released its preliminary results for the 12 months to 29 April on Wednesday, reporting group like-for-like revenue as growing 4%, with statutory revenue up 9%.

18:06 Broker tips: BT Group, Provident Financial, William Hill

Macquarie lifted its recommendation on shares of BT Group to 'outperform' for the first time ever, telling clients that investor caution around the prospects for the operator's future free cash flows had now overshot and that markets were overlooking the upside to be had from its EE unit.

18:02 Macquarie raises target price on BT, says investors too pessimistic

Macquarie lifted its recommendation on shares of BT Group to 'outperform' for the first time ever, telling clients that investor caution around the prospects for the operator's future free cash flows had now overshot and that markets were overlooking the upside to be had from its EE unit.

17:34 London close: FTSE down as Carney, Draghi plead 'Don't let me be misunderstood'

Stocks in London flopped to a lower close Wednesday as Bank of England governor Mark Carney and European Central Bank chief Mario Draghi separately sought to ensure their earlier comments to the market were not misunderstood.

17:25 WTI futures jump as DoE data reveals drop in domestic output

Oil futures snapped higher on the heels of US government data showing a drop in domestic oil production, although crude stockpiles did edge higher.

17:11 Qatar criticises Saudi Arabia for refusing to negotiate on blockade demands

Saudi Arabia and its Gulf allies have been condemned by Qatar after the alliance refused to negotiate on its 13-strong list of demands to its neighbour.