Credit Suisse emphasises Primark's importance to Associated British Foods

Credit Suisse analysts reiterated their ‘buy’ rating for Associated British Foods (ABF) on Monday, telling clients they expected the company to see strong results from ingredients and groceries, as well as from Irish retailer Primark.

Twinings and Ovaltine were expected to drive the success of ingredients, while groceries were projected to benefit from reduced losses in bread and the Acetum acquisition.

High street retailer Primark was also seen as a key factor in the company's second half results presentation scheduled for 17 April.

On Primark, the analysts said: "Over the next year, the key will be the extent that Primark can absorb the benefits of lower input costs as US$ hedges roll off. While apparel retail has typically been deflationary, we believe most retailers need to rebuild margin and will maintain prices. We forecast Primark margins increasing 45bp in 2H and 35bp in 18/19, but with margins well below historic levels, see considerable upside potential."

As such, the company’s dividend per share was seen rising by 5% to 43.00p in 2018, with further year-on-year increases of 2.00p forecast for 2019 and 2020.

However, in general they believed that ABF was in line for a relatively uninteresting year in comparison to last year's "fireworks", which saw sales rise 19%, driving a 36% jump in the company's EBIT.

Analysts also saw it fit to reduce their target price on the shares from 3,700p to 3,300p, due to weak retail peer multiples.

"The shares have fallen 25% in 6m and de-rated partly in response to the predictable cyclical downturn in sugar, but principally in response to the derating of apparel peers. However, we now believe that Primark is discounted at £11bn, ie 12.7x 12m FWD EBIT and 16.3x PER which materially undervalues its L-T growth prospects relative to peers, particularly given the strengthening margin outlook," said analysts.

As of 1650 BST, Associated British Foods’ shares were up 3.09% at 2,572.00p.