Morgan Stanley upgrades AB Foods to 'overweight'

Michele Maatouk WebFG News | 13 Feb, 2017 09:20 | | |

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17:25 17/11/17

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.

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