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Barclays trims target price for Associated British Foods but remains confident in Primark growth prospects

The bank said it expects Primark's scope for growth to be "considerably greater" than its rival company Inditex

Primark storefront
Barclays said the poor weather in the first part of 2018 only had "a limited bearing on the FY group outlook”

Barclays PLC (LON:BARC) has trimmed its target price for Associated British Foods PLC (LON:ABF) (ABF) to 3,330p from 3,380p but said it remains confident in its growth prospects for the company’s clothing arm Primark.

In a note to clients, the British bank said results from the FTSE 100 food and clothing retailer for the half-year “may not prove a catalyst as such, but we certainly expect steadier news flow and commentary starting with confidence around an H2 [second-half] margin recovery at Primark (with the group currently sitting on favourable FX tailwinds – possibly ahead of current guidance).

READ: AB Foods expects first-half profit to be in line with last year, held back by fall in sugar revenues

“We expect few surprises with the results due 17 April, with the group having provided a detailed pre close (26 Feb).  Poor weather in March in the UK / Europe has been well documented in recent retail reporting, and we account for this in our estimates (FY LFL at Primark moves from -1.1% to -1.4%). We believe this only has a limited bearing on the FY group outlook,” the bank added.

Barclays was also upbeat about the potential growth of Primark: “We also expect to gain comfort on the prospects for Primark’s business on the [European] continent as well as the midterm outlook for Sugar. We do not rule out growing confidence in the proof of concept for Primark US through the course of H2, with the likelihood of a further roll-out soon thereafter.

“Based on our Food division valuations (9.1x CY18E EBITDA), we estimate Primark trades on 8.7x CY18E EBITDA, a 32% discount to Inditex (or a 3% discount to low-growth Next). Inditex is structurally higher margin / return vs Primark. However, Primark is one-fifth the size of Inditex outside of their respective domestic markets, or in only 12 countries vs 96 at Inditex. This implies Primark’s scope for long-term space growth (in CE alone) should be considerably greater.”

ABF shares were slightly lower in mid-morning trading Thursday, down 0.8% at 2,474p.

Quick facts: Associated British Foods PLC

Price: 2465 GBX

Market: LSE
Market Cap: £195.15 m

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