Food producer to high street clothing retailer Associated British Foods PLC (LON:ABF) got a boost today as US bank Morgan Stanley raised its rating for the stock.
The bank’s analysts have upped their stance on ABF to 'overweight' from 'equal-weight' with an increased price target of 2,800p, up from 2,650p.
They said the changes reflect an increase in their valuation for ABF’s sugar business “to reflect improving prospects.”
In early morning, ABF’s shares on the FTSE 100 index rose just over 1%, or 27p to 2,527p.
In a note to clients, the bank’s analysts said they feel that a share price drop of around 30% by ABF over the past 10 months was overdone.
They pointed out that the shares have fallen despite consensus earnings forecasts marginally increasing.
Primark very healthy …
The analysts added that investors have become too focused on clothing retail chain Primark's like-for-like sales, and although sales have slowed, thinks it remains a very healthy business.
They said: "Primark remains an excellent long-term international growth story and its margin problems are temporary, in our view.”
The analysts added 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.
They said: "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."