Deutsche Bank lowers target price on AB Foods

Analysts at Deutsche Bank lowered their target price on Primark owner AB Foods from 1,850.0p to 1,575.0p on Monday, stating "reality" was now dawning.

Deutsche Bank noted that AB Foods had lowered expectations for the 2023 trading year, largely on lower Primark margins due to "mounting pressures" on consumer income limiting the ability to pass through to input costs, foreign exchange woes, and energy cost inflations to consumers.

"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," said DB.

"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 circa 150 basis points year-on-year."

The German bank now forecasts Primark like-for-like sales to be down 3% on its overall assumption of a roughly 5% drop in real incomes.

However, DB stated that whilst the shares took another leg down on the profit warning, it thinks much has now been incorporated into the stock's valuation and reiterated its 'hold' rating on AB.

Reporting by Iain Gilbert at Sharecast.com