Primark discount fashion chain to Silver Spoon sugar conglomerate Associated British Foods PLC (LON:ABF) got a boost today as US broker Jefferies International upped its rating for the stock ahead of the group’s first-half results next week.
In a note to clients, analysts at Jefferies raised their rating for AB Foods to ‘buy’ from ‘hold’ with an increased target price of 3,100p, up from 2,450p previously.
In early morning trading, AB Foods’ shares topped the FTSE 100 leader board, adding 3.1%, or 82p at 2,697p.
READ: AB Foods maintains its earnings guidance ...
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The analysts said: “The 19 April interims should confirm strong results (sales +18%, EBIT +30%, EPS +28%) thanks to fx (forex) translation boost and a sugar rebound.”
They added: “While we expect minimal Primark H1 EBIT progress (given sales +21% but margin -160bps due to gross margin headwinds), the key focus will be on Primark's future margin trajectory (we now forecast +100bps to 10.4% by 18/19, from a 9.4% trough in 16/17).”
The analysts pointed to evidence of price recovery starting to come through in Germany, and said they expect this to extend to the UK as competitors will have to “move up to defend profitability, especially given their greater exposure to trading down risks in the UK.”
They added: “In sugar we assume >£200m of EBIT can be defended post the September 2017 quota removal, as sterling devaluation has severely dented the competitiveness of French imports into the UK market.”
Cash firepower …
Jefferies estimates that ABF will have net cash balances of around £300mln at the 2016/17 year-end which could support as much as £3bn of M&A firepower.
The analysts added, however, that although AB Food's recent track-record on M&A value creation is impressive, they think an upped dividend payout – maybe a special payout - could be a more effective way for the group to re-leverage.
They also concluded that valuation attractions have emerged for the stock, with Primark's implied value “ nicely backed” by its estimates, and the relative discount of AB Foods food staples business of around 10% close to the trough of the past five years.”
Target trimmed …
Analysts at Swiss broker Credit Suisse were slightly less bullish on AB Foods in a note today, however, reducing their target price for the stock to 3,200p from 3,550p, albeit whilst reiterating an ‘outperform’ rating on the stock.
They noted: “ Half the earnings and three quarters of the value of ABF lies in Primark, whose implied PE multiple having risen to 45x has subsequently fallen to 25x in the last 12-18 months as concerns about the UK high street, on-line advances and FX related input cost pressures take their toll on sentiment and estimates."
But, the analysts added, “surely the real bull case for Primark is that it is still very much in its infancy outside the UK. Wherever it has opened overseas the response has been resoundingly positive."