Deutsche Bank sees scope for ABF to increase dividend payout ratio

Deutsche Bank bumped up its recommendation and target price on shares of Associated British Foods.

The near-term outlook for the company was "positive", analysts Warwick Okines, Jaina Mistry and Charlie Muir-Sand said in a resaerch note sent to clients after the close of trading in London on 29 July.

They referenced improving sugar prices, recent moves in foreign exchange markets and flexibility in the company´s balance sheet as the reasons for hiking their target price from 3,000p to 3,200p and lifting their recommendation from 'hold' to 'buy'.

The analysts also said the company´s fashion arm, Primark, was continuing to power ahead for the long-term, thanks to its price leadership and "significant" room for growth in Europe and Stateside.

"Our benchmarking confirms Primark´s model is hard to replicate. It can afford to sell at less than half the price and make less than half the profit per garment as H&M because its volume densities are so high. Despite its low prices it makes the same profit per sq ft as Inditex. With similar capex spend per sq ft and a longer growth runway, Primark is very well positioned," they explained.

Shares in ABF were not inexpensive, they added, but following three years of almost no growth in the firm´s earnings per share they believed the stock might be reaching an inflection point.

On their estimates, the firm´s EPS were set to expand at a compound annual growth rate of 13% to 2019.

Over half of the group´s profits came from outside the UK and its balance sheet was the strongest that it had been in a decade; so much so that Deutsche Bank saw scope for the company to raise its 35% dividend payout ratio.

ABF stock had underperformed both the Footsie and the second-tier index since the referendum vote, the analysts pointed out.

Yet it was trading at 24 times forecast earnings for calendar year 2017, close to its global peers.

Deutsche Bank´s target price was based on a sum-of-the-parts valuation method.