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AB Foods shares a mismatch with Primark’s true value, says Berenberg

While UK sales at Next have plunged 10% in the last three years, Primark’s UK sales have increased by 17%, while its sales densities are twice as much the high street rival’s, along with greater overseas potential

Associated British Foods PLC -

Shares of Primark owner Associated British Foods PLC (LON:ABF) are a mismatch compared to the “exceptional value” provided by the fast-fashion brand, analysts at Berenberg have said, with the company trading not far off its lowest levels since December 2012.

However, seven years ago earnings were 30% lower, the analysts pointed out as they reiterated their ‘buy’ recommendation.

Market sentiment over the multinational food processing and retailing company has decreased due to sterling weakness and sugar price uncertainty, as well as the wider difficulties of the retail sector.

Primark, which brought in two-thirds of ABF’s total profits last year, reported a 2% decline in like-for-like sales in the half-year report, possibly leading investors to believe it was sinking like many other UK peers.

Overseas opportunity and sales density

“We think current weakness is now more than priced in,” Berenberg said in the note to clients on Monday, adding that Primark’s international opportunity is “underappreciated” and its sales densities offer “exceptional value”.

While UK sales at Next PLC (LON:NXT) have plunged 10% in the last three years, Primark’s UK sales have increased by 17%, while its £478 per square feet sales densities are twice as much the high street rival’s.

Berenberg added that Next is more exposed to the core UK market, while Primark’s 55% sales come from international developments with “significant rollout potential”.

“We forecast international to drive a 5% revenue and 4% underlying earnings compound annual growth rate for Primark over the next three years, compared with 3% and 0% respectively for Next,” the broker said.

Nonetheless, the market is valuing Primark at 44% less than Next, although it used to be valued 19% more.

Berenberg reckon ABF will get a pick-up based on Primark’s performance in the first quarter of the new financial year as well as on foreign exchange developments, with a rise in sugar prices also expected to sweeten that segment.

Shares were up 0.5% to 2,240p on Monday afternoon, still 17% below the trimmed price target of 2,700p.

Quick facts: Associated British Foods PLC

Price: 1965.825 GBX

Market: LSE
Market Cap: £15.58 billion

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