Analysts at Deutsche Bank have cut their target price for Associated British Foods PLC (AB Foods) to 1,575p from 1,850p following last week's pre-close season trading upate from the owner of clothing retailer Primark and a number of well-know food brands.
In a note to clients, the Deutsche Bank analysts said: "AB Foods has lowered expectations for FY23e, largely on lower Primark margins due to the mounting pressures on consumer income limiting the ability to pass through the input cost, FX and energy cost inflation to the consumer."
They added: "Our cautious view on the stock was driven by a fear of weaker sales from the squeezed lower income demographic and we assumed the retailers would protect margins with price increases. The decision to not pass through all of the inflation may lead to share gains for Primark and reflects the longer-term stance taken by management.
"We now assume a 7.5% EBIT margin, which is down c.150bp yoy. We forecast Primark LFL down -3% on our overall assumption of a c.-5% drop in real incomes."
The analysts concluded: "Whilst the shares took another leg down on the profit warning, we think much is now incorporated in the valuation and remain Hold rated but lower our target price to 1,575p."
After dropping back last week in the wake of the trading update, AB Foods shares managed to rally 1.7% higher to 1,378p in morning trade on Monday.