RBC Capital upgrades AB Foods to 'outperform'

RBC Capital Markets bumped up its rating on shares of Primark owner Associated British Foods to ‘outperform’ from ‘sector perform’, arguing that the stock is "overlooked and undervalued".

The bank, which lifted its price target on the stock to 2,300p from 2,200p, said ABF has been left behind in the recent sector rally even though the prospects for its two main businesses are improving.

"We think Primark's low prices provide a barrier to entry versus online players, and Grocery is delivering double-digit profit growth," it said. "In addition ABF has circa 5% of its market cap in cash and the implied valuation of Primark looks undemanding."

RBC said that based on a review of industry data, it reckons Primark's like-for-like sales are likely to be fairly stable quarter-on-quarter, with transaction numbers improving, strength in Ireland and the US, weakness in parts of Europe, such as Spain, and the UK positive excluding big city centre stores.

As far as the grocery segment is concerned, it said that following flat revenues in the first half, H2 revenues have strengthened, driven by increased consumption at home, with strong sales for the high-margin Twinings business, particularly in the US, France and Australia.

"Grocery overall looks set to post its third consecutive year of double-digit profit growth," RBC said.