Berenberg cuts rating on AB Foods to 'hold'

Berenberg downgraded its rating on Associated British Foods to ‘hold’ from ‘buy’ but lifted its target price to 3,000p from 2,760p on Wednesday.

The broker said AB Foods shares are up 25% since hitting a post-Brexit vote low of 2,350 on 27 June when Berenberg upgraded the stock to ‘buy’ to reflect an “absurdly” low valuation of 20x price-earnings ratio in comparison to mid-2015 levels of over 30x.

“FX movements aside, little had changed in the underlying business during the period and indeed the outlook for group profits was being supported by a significant step-up in world sugar prices over the last year,” Berenberg said.

On Berenberg’s new forecasts, ABF trades on 25x calendar year 2017 price-earnings ratio, which the broker believes is “fair” for a 9% three-year forward earnings per share (EPS) compound annual growth rate.

In its third quarter update in early July, AB Foods said the UK’s exit from the European Union will have limited impact on its business.

Since the referendum, the main impact on the group has been related to foreign exchange with the pound down 10% against the dollar and the euro. As a result ABF said it “no longer expects” to see a decline in the group’s EPS due to the positive translation effect of profits outside the UK and no material impact on margins.

Berenberg estimates the group will also benefit from an increase in sugar profit.

The broker expects about 45% of AB Food’s total sugar volumes and 35% of divisional sales come from its European operations.

“World sugar prices have increased by over 60% from the seven-year low levels in September 2015 supported by the prospect of a global supply deficit due to El-Nino-related dry conditions in some key markets.”

Berenberg believes the company can achieve €550 per tonne on average, which would support an estimated £165m earnings before interest and tax in sugar for 2017.

“Our EPS forecasts increase by 3-5% in the outer years reflecting our expected increased Sugar profit impact and 3% growth in 2016.

“On a relative basis, the stock is trading on a 75% premium to the market compared to its 65% average premium since 2010 and on a 30% premium to European consumer staples compared to the its 25% average since 2010.”

Shares fell 0.13% go 3,047p at 0938 BST.