Morgan Stanley downgrades AB Foods on Primark valuation

Associated British Foods was under the cosh on Wednesday after Morgan Stanley cut its stance on the stock to ‘equalweight’ from ‘overweight’ and slashed the price target to 2,650p from 3,500p as it took a fresh look at Primark.

The bank said that while Primark remains a great business with attractive long-term growth prospects, its like-for-like sales have slowed to zero over the last 18 months or so.

“With Kantar data suggesting that trading momentum in the UK has weakened further recently, we now expect -1% LfL for FY H2.This means we now expect LFL to be negative for the year as a whole– something that we have not seen from Primark in more than 15 years.”

MS said that it was not sure why LFL growth was slowing so much but is concerned it could be partly due to structural factors.

It now values Primark at £15.1bn versus £22.2bn previously, which leads to the downgrade of the stock.

Morgan Stanley said it remains a big fan of Primark and its discounter business model and customer proposition, but now sees it as 10-12% per annum growth business rather than one capable of delivering 15-20% growth.

It reckons Primark has limited further space growth opportunity in the UK and Ireland but is optimistic about its prospects in the US, although it does not expect it to become a material driver of space growth before 2019.

At 0924 BST, AB Foods shares were down 3% to 2,815p.