Goldman Sach has cut its rating Associated British Foods PLC (LON:ABF) to ‘neutral’ from ‘buy’ on valuation grounds in spite of raising its target price and estimates following the Primark clothing stores to sugar and food conglomerate’s latest trading update.
In a note to clients, the US investment bank’s analysts pointed out that Primark’s revenue decline of 75% in the group’s third-quarter, was ahead of their expectations for a 90% drop.
They added that, notably, since reopening stores on May 4, Primark like-for-like sales were -12% year-on-year, and trading in England and Ireland in the week ended June 20 (with about 90% of selling space reopened) saw revenue up year-on-year, and in addition, markdowns have been minimal.
The analysts noted that the group’s full-year 2020 outlook is for Primark to have year-end selling space of 16.3mln square feet and adjusted operating profit in the range of £300mln-£350mln.
They pointed out that AB Foods continues to expect strong progress in full-year operating profit for Sugar, Grocery, Agriculture and Ingredients.
The analysts said that given the guidance, they have increased their earnings per share estimates for AB Foods to 72.32p from 66.49p for the full year to end September 2020, to 122.81p from 104.68p for the same period in 2021, and to 131.86p from 124.02p in 2022.
They said this assumes Primark achieving EBIT of £340mln in 2020, £715mln in 2021, and £770mln in 2022, driven by revenue of -24%, +20%, +2%, respectively, versus estimates of -34%,+18% and +5% respectively, previously, reflecting better-than-expected initial trading post lockdown, while their Food division EBIT forecasts are unchanged.
The analysts raised their sum-of-the-parts based 12-month target price for AB Foods to 2,360p from 2,250p following the earnings increase.
They said: “This assumes peer group valuation metrics for ABF’s food manufacturing earnings and values Primark using a 10-year DCF, and implies FY22E P/E multiples of 13x for Primark and 18x for Food. In the context of 15% upside to this PT vs. our +16% coverage average, we move to Neutral (from Buy).
“Since being added to the Buy List on November 6, 2019, the shares are down by 16% vs. the FTSE World Europe down 7%. The underperformance stems from the COVID-19 outbreak in 1Q20.”
In lunchtime trading on Friday, shares in AB Foods were 0.9% lower at 2,027p.
Published at Fri, 03 Jul 2020 11:09:00 +0000-AB Foods rating cut to ‘neutral’ from ‘buy’ by Goldman Sachs on valuation grounds after update