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Primark remains growth engine for ABF, says Liberum

Liberum has maintained its ‘buy’ rating on ABF and raised its target price to 3,500p from 3,150p

Primark fashion
Well-positioned to take market share and drive double digit sales growth

Primark owner Associated British Foods (LON:ABF) shares offer compelling exposure to secular growth trends in retail over the next 10 years, analysts at Liberum said.

Liberum maintained its ‘buy’ rating on the stock and raised its target price to 3,500p from 3,150p, citing “strong” fiscal year 2017 trading and a “robust” profit outlook for 2018.

“In our view, Primark remains well-positioned to take market share and drive double digit sales growth, backed by visible new annual space additions of 1.2m+ sqf, underpinned by Continental (Europe) roll-out,” Liberum said.

READ: ABF shares fall on plans to reduce size of US Primark stores as it reports full year profit growth

In the year to 16 September 2017, adjusted operating profit rose 22% to £1.3bn and revenue increased 15% to £15.4bn, driven by growth in Primark.

The company said selling space expansion at Primark would continue, mostly in the UK, and it predicts an increase in retail profit in the current year.

Liberum said Primark remains the “growth engine”. “High sales densities and solid like-for-like sales underpin double-digit revenue growth for Primark.”

Lower sugar profits due to abolition of quotas

However, the broker cut its earnings per share (EPS) estimates for fiscal years 2018 to 2019 by 6%, reflecting lower sugar profits as a result of a significant increase in volumes in the EU following the abolition of production quotas.

It forecasts sugar profits of £177mln in 2018, down 20% on the previous year. But ABF has taken action ahead of the production quotas by cutting costs, restructuring assets and locking in lower sugar beet prices on multi-year contracts.

“We ultimately expect ABF will be a net winner as the industry further consolidates,” Liberum said.

Liberum expects 5% growth in group pre-tax profits in 2018, driven by all divisions except sugar.

ABF is projected to deliver a 9% adjusted EPS compound annual growth rate over fiscal years 2017 to 2022, excluding mergers and acquisitions. Growth could improve if the roll-out of Primark stores quickens, Liberum said.

Conservative balance sheet offers further opportunity: Liberum

The broker also thinks a “conservative balance sheet” offers further opportunity for strategic investments in store parcels for Primark and selected grocery bolt-on deals.

ABF cut last year’s net debt to end 2017 with net cash balance of £673mln.

Its margins also recovered in 2017 on strong trading at Primark and a rebound in sugar prices. Margins are expected to fall in 2018 as EU sugar prices drop and the company gets rid of maturing stores, according to Liberum.

Liberum sees margins rising by 80 basis points to 9.7% by 2022, boosted by the continued roll-out of Primark stores, demand for sugar in South Africa, growth in grocery and cost reductions in the food ingredients arm.

Quick facts: Associated British Foods PLC

Price: 2528.6868 GBX

Market: LSE
Market Cap: £20.02 billion

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