Primark: sweetest thing for AB Foods

ANALYSIS_ Primark has become the engine for AB Foods, largely contributing to offset the British group’s weaker sugar business performance. Analysts at UBS have recently rated as ‘buy’ the stock, highlighting that should trade “on a higher multiple due to the structural growth story

at its retail division Primark”.

Following the retail group’s first-quarter update, the Swiss bank has nominated Associated British Foods as its ‘Key Call’, hiking its target price for the stock from 2,430 to 2,890 pence.

“Primark

is now being valued – based on the current share price – as 70 percent of the whole company given UBS’ 15.5 billion pounds valuation for the retailer”, reports ‘IFA Magazine’.

Shares at the group have been trading upwards since the beginning of the year, spurred by rumours of a potential floatation for its apparel division Primark, according to sources quoted by the ‘Daily Mail’.

Associated British Foods said sales at its Primark discount fashion chain were strong over Christmas, hence overcoming the struggles caused by unseasonably warm autumn weather and helping counterbalance a weaker-than-expected performance at its sugar unit.

“Primark probably increased same-store sales by 4 percent in the first quarter, accelerating to 8 percent in the run up to Christmas,” Panmure Gordon analyst Graham Jones said in a note to clients earlier this week.

Primark’s strong performance offsets AB Foods’ sugar struggles

Group revenue was flat for the 16 weeks to January 4, compared with 9 percent growth for the year ended September 14, with Primark’s constant-currency growth of 12 percent helping make up for a fall of 27 percent for sugar.

UBS has named food ingredients and retail firm Associated British Foods as its ‘Key Call’, as it hiked its target price for the stock from 2,430 pence to 2,890 pence following last week’s first-quarter update.

‘Despite sterling’s strength and a further deterioration in the outlook for the sugar business (as prices have continued to fall), management maintained full-year earnings expectations,’ UBS said. ‘This has been possible because of a better-than-expected performance from Primark and good inventory management.’

The bank believes that AB Foods, rated ‘buy’, should trade on a higher multiple due to the structural growth story at Primark.

“Primark is a hard discount clothing retailer that combines very low prices with a ‘fast-fashion’ component to generate best-in-class sales densities. The formula has been very successful in the UK (with circa 160 stores) and is now being rolled out in mainland Europe (where sales densities are proving to be higher than in the UK), although with only 50 stores Primark is at a very early stage in its international development,” summarised in a note to investors its views on Primark the analysis team at UBS.

On another note, Numis Securities Ltd has lowered shares of Associated British Foods to a ‘sell’ rating in a research report released on Thursday morning, Analyst RN reports. The stock has a 52-week low of 1,602 pence and a 52-week high of 2,726 pence. The company’s market cap is 21.258 billion pounds.