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Primark's US expansion in doubt as Morgan Stanley downgrades AB Foods

Primark's management regards its US pull-back as "fine-tuning" and remains committed to the US market, but MS now assumes no further expansion in the US in its base case
Primark model
Even the mighty Primark is finding the US market a tough nut to crack

Primark could become the latest successful UK retailer to come a cropper in the US, opined US investment bank heavyweight, Morgan Stanley.

The bank is stripping out further Primark US expansion from its base case model on Associated British Foods plc (LON:ABF), the owner of Primark.

READ: Primark remains growth engine for ABF, says Liberum

As a result, the stock has been downgraded from ‘overweight’ to ‘equal weight’, with an increased price target of 3,100p, some 55p above the current AB Foods share price and 300p higher than Morgan Stanley’s previous target price.

Morgan Stanley said it is struggling to identify positive catalysts for the share price on a 12-18 month horizon,

“We have not given up on Primark eventually succeeding in the US, but now believe that it will be at least another 12-18 months before any further expansion is announced, and with Primark currently delivering c7% lfl [like-for-like] sales in the UK, and sales densities in Europe already extraordinarily high, we find it hard to see where incremental good news will come from in the coming months,” Morgan Stanley (MS) said.

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

On the plus side, MS is increasing its sum-of-the-parts valuation of the group’s food division, which includes Twinings Ovaltine and Jordan Ryvita from around £3.7bn to roughly £5;.6bn.

Nevertheless, Primark remains the key to AB Foods in MS’s view, and the retailer has not signed any new leases in the US for around 18 months and has announced plans to reduce the size of three of its eight stores in the US.

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