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On Monday, BofA Securities has resumed its coverage of Associated British Foods (ABF:LN) (OTC: OTC:ASBFY), assigning the stock an Underperform rating and setting a price target of £17.50. The new price objective reflects a cautious outlook on the company's growth prospects, particularly for its Primark brand in the UK, and anticipates challenges due to rising raw material costs in the Grocery segment. According to InvestingPro data, the stock is currently trading near its 52-week low, with a P/E ratio of 9.73 and a dividend yield of 3.96%.
The analyst from BofA Securities expressed concerns over the expected limited like-for-like (LfL) growth for Primark in the UK market. This assessment comes alongside the anticipation that increasing costs for raw materials will negatively impact profit margins within the company's Grocery division. Recent InvestingPro data shows modest revenue growth of 1.64% in the last twelve months, while the company maintains a strong free cash flow yield.
BofA Securities predicts a modest earnings per share (EPS) compound annual growth rate (CAGR) of 2% for Associated British Foods over the next three years. This rate is significantly lower than the group's historical growth rate of 10%. The analyst's projection is based on a discounted cash flow (DCF) valuation method.
Despite the current valuation of Associated British Foods shares at 11 times the fiscal year 2025 estimated price-to-earnings (PE) ratio, which represents a 5% discount compared to the industry, BofA Securities considers the stock to be expensive. This valuation stance is taken in light of the lower revenue and EPS growth expected for the company over the forecast period. However, InvestingPro analysis suggests the stock may be undervalued, with additional ProTips and comprehensive valuation metrics available to subscribers through the Pro Research Report, which provides deep-dive analysis of 1,400+ top stocks.
In conclusion, the reinstatement of coverage by BofA Securities with an Underperform rating and a price target of £17.50 underscores a conservative view on Associated British Foods' future financial performance. The firm's analysis suggests that investors should temper their expectations for the company's growth in the near term.
In other recent news, Associated British Foods (ABF) has experienced several significant developments. The company reported robust financial growth in a recent earnings call, with a considerable increase in operating profit and adjusted earnings per share. Group revenue rose to GBP 20.1 billion, a 4% increase on a constant currency basis, and the company proposed a 50% increase in total dividends, amounting to over GBP 650 million.
However, both Morgan Stanley (NYSE:MS) and Citi analysts have downgraded ABF's stock rating due to concerns about the future earnings and sales outlook, particularly for its Primark brand. Morgan Stanley lowered its rating from Equalweight to Underweight and reduced the price target to £19.00, while Citi downgraded the stock from Neutral to Sell, setting the price target at £17.70.
These downgrades reflect anticipated challenges in the UK apparel retail sector and the UK food businesses, with a projected decrease in Primark's sales and a negative impact on Primark's gross margin due to the strength of the US dollar. Despite these concerns, ABF remains focused on growth, with ambitious investment plans, especially for its Primark brand, targeting mid-single-digit growth for 2025.
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