Associated British Foods PLC (LON:ABF) has been upgraded to ‘sector perform’ from ‘underperform’ by analysts at RBC as the Canadian bank predicted a “stronger recovery in profitability” form the company’s Primark chain of discount clothing stores.
In a note on Monday in which it also upped its target price for the firm to 2,200p from 1,800p, RBC said Primark’s low prices “should position it well in a consumer downturn and protect it from online competition”, adding that they expected “large variances in soft city centre and strong regional store trends to normalise gradually over time”.
READ: AB Foods rating cut to ‘neutral’ from ‘buy’ by Goldman Sachs on valuation grounds after update
“We now expect Primark to see a stronger recovery in profitability in [the 2021 to 2022 financial year] due to its low-price positioning, cost and inventory control, with low markdowns”, RBC said.
The bank’s analysts also said ABF’s grocery business had “helped to save the day” in 2020 as strong performance from the Twinings and Ovaltine brands and loss reduction at Allied Bakeries helped offset the declines from Primark’s closure,
RBS said these performances “should help ABF end the year with net cash of at least £750mln”, which they said was “impressive” considering its largest business, Primark, had been shit for two to three months.
“The ABF share price has lagged the General Retail index by [17 percentage points in the second quarter] in Q2. Given this and our Primark upgrades, the implied [price to earnings ratio] for Primark is now 16x, which we consider more reasonable for what remains a best in class value retailer, which is operating in a tough sector but should in time benefit from capacity withdrawal e.g., from New Look and other retailers”, RBC concluded.
Shares in ABF rose 0.5% to 2,037p in late-morning trading.