Primark owner Associated British Foods PLC (LSE:ABF) remains a ‘buy’ with broker Shore Capital following its full-year results, despite the challenging external environment and the decision to take a hit on profit margins and not raise prices in the face of rising costs.
The broker noted since the FTSE 100 company’s financial year end in September, the Liz Truss and Kwasi Kwarteng budget disaster has been and gone, which should apply "some soothing cream to sterling", important for an international business such as ABF.
However, retail analysts Clive Black and Darren Shirley at Shore Capital said that some issues still persist, including a weak euro against the dollar, war in Ukraine, increasing trade friction, high inflation, and the prospect of recession.
“External environment from the commencement of the pandemic has thrown up many more challenges than opportunities for ABF,” said the pair.
Despite this, the Shore Capital team did not adjust full year operating profit expectations of just under £1.3bn and profit before tax of £1.25bn.
Black and Shirley said that they were disappointed by ABF’s share price movement, down 27% in the year so far, given it is a goal business and has “considerable non-discretionary activities” via its grocery arm.
Essentially, the pair believe that Primark’s performance and outlook has dictated ABF’s share price.
The market, they said, views Primark as an arm with a lack of digital offering, potentially weak demand in times of recession and gross margin pressure if currency fluctuations continue.
Despite growth in Primark, the market continues to have a “downer” on the retailer, which has been weighing on ABF’s shares.
Overall, however, the analyst pair still views the shares as undervalued, and believes ABF is a business with “great values, a strong portfolio of well-invested businesses, a outstanding financial constitution, broad scale relevance in a world depleted of food security, and scope for a strong medium-term expansion.”
Analysts at UBS said the market was "broadly pricing in weakness following the margin downgrade [in September]", and they see today's announcement of a £500mln buyback as well as the better than expected adjusted operating profit as "likely being positive for the shares".
But they had questions for management regarding current trading and cost inflation, noting the reiteration today of guidance around Primark's margin being below 8% for 2023 due to the dollar strength and the outlook for "significant sales growth".
UBS has a 'neutral' rating and a 1,450p share price target.