Numis upgrades AB Foods to 'add' from 'hold'

Associated British Food’s rating was raised to ‘add’ from ‘hold’ by Numis on Thursday after the company said the weaker pound had improved the outlook for the current financial year.

The owner of Primark said it no longer expected a decline in adjusted earnings per share for the full year as it was set to benefit from a “significantly” weaker pound after last week's Brexit vote.

The company said the foreign exchange rates would have both a positive and negative effect on profit. “There would be an adverse transactional effect on the profit margin on Primark's UK sales, currently half of its turnover, a favourable transactional effect on British Sugar's margins and a translation benefit on group profits earned outside the UK, which last year were some 50% of the total,” AB Foods said in a trading statement for the 40 weeks to 18 June.

Numis said while the upgraded outlook on full year EPS was a plus, Primark’s margins would come under pressure due to drop in the value of the pound. The broker cut its target price to 3016p from 3145p to reflect the impact on Primark.

“We had previously assumed a 30 basis points (bps) year-on-year earnings before interest and tax margin decline for Primark next full year from existing transactional foreign exchange negatives and now assume an extra 150 bps impact so the margin is 10.0% versus an estimated 11.8% this full year,” Numis said.

“We also assume a modest like-for-like negative for sales this full year for Primark to allow for the adverse March and April weather effect publicised by H&M etc (ABF's first half was for the 24 weeks to 27/2/16 with the like-for-like off by sub 1% in the first half).”

Numis said its profit-before-tax expectations for 2016 to 2018 have changed from a previous £1.09bn, £1.20bn and £1.31bn, respectively, to £1.12bn, 1.20bn and £1.29bn.

Revenue estimates before were for £12.97bn, £13.65bn and £14.34bn for the same period. Numis now expects revenue of £13.12bn for 2016, £14.31bn for 2017 and £15.02bn for 2018.

Shares rose 8.81% to 27775p at 0941 BST.