Deutsche Bank ups target for ABF on strong growth at Primark

Deutsche Bank upped its target price for Associated British Foods on the premise that it was set to continue benefiting from a consumer shift towards value driven by pressure on spending power.

To back up its case, it pointed to the company's 13% sales growth over the 16 weeks to 24 June and data from Kantar showing a continued loss of market share by the largest mid-market retailers while Primark was gaining.

Indeed, Primark had seen like-for-likes in the UK accelerate from growth of 2% during the first half to 6% during the third quarter.

According to Kantar data, it was also still gaining market share despite not being in the online channel.

Management was also succeeding in mitigating supply chain inflation as a result of the weker pound, Deutsche said.

Analysts at the broker said that was "particularly encouraging" and that the benefits should roll into the first half of 2018, giving them "greater confidence" that margins could be rebuilt next year.

Deutsche said it was also expecting significantly higher profits from sugar in the third quarter and for them to remain at their new level in 2018.

In valuation terms, the shares' were trading on a calendar year 2018 price-to-earnings multiple of 21.6, a smaller premium versus its peers than over the last few years.

"Margin recovery on top of continued store growth is an attractive combination. Across the other 50% of the group the trends were largely healthy, with continued growth in Sugar and bread margins the only thing that failed to rise in Grocery."

Among the downside risks to watch out for, Deutsche Bank said investors should monitor anything that might slow down Primark's store expansion and profit growth, declining sugar prices and medium-term uncertainty about EU sugar in a post-quota world.

The broker raised its target from 3,200p to 3,300p and stuck to its 'buy' recommendation.