AB Foods downgraded to 'hold' from 'add' by Numis

Associated British Foods shares fell on Tuesday as Numis downgraded its rating on the stock to ‘hold’ from ‘add’ and cut its target price to 2,942p from 3,016p following a trading update from the Primark owner.

The company on Monday said it predicted full year earnings to be slightly ahead of last year's, although like-for-sales at Primark are expected to have deteriorated and news of a sizeable pension deficit set off alarm bells with investors.

A previous small pension surplus has in recent weeks morphed into a £200m pension deficit after the marked decline in UK long-term bond yields post the Brexit vote, which the company said would result in an increased service cost and a higher interest charge next year.

Apart from this scare, the 53 weeks to 17 September were mostly rosy for AB Foods, which also announced the sale of its cane sugar business in southern China for an unnamed amount.

Operating profits will now be ahead of last year after exceeding management expectations in the second half of the year, helping alongside lift earnings per share "marginally" ahead of last year.

Like-for-like sales at fast-fashion retail arm Primark are expected to be down 2%, decelerating from the 1% decline in the first half of the year.

Numis said: “This update is largely favourable, echoing many remarks in that of 7 July. Fresh news is that full year 2015/16 will be a 53 week period and that agreement has been reached to divest the cane sugar business in southern China for an undisclosed price.”

The broker expects full year 2016 pre-tax profit of £1.076bn, down from a previous estimate of £1.128bn, taking into account the 53rd week and factoring in the update on the sugar and Primark businesses. Pre-tax profit in 2015 was 1.024bn.

Shares dropped 2.88% to 2,734p at 0953 BST.