RBC Capital downgrades AB Foods, cites pressure on Primark

(Sharecast News) - RBC Capital Markets downgraded Associated British Foods on Monday to 'underperform' from 'sector perform' and slashed the price target to 1,850p from 2,050p, sending shares in the Primark owner sharply lower.

The bank said that as part of its more cautious view on the European retailing sector, it sees further downside risk to consensus earnings forecasts, mainly due to pressure on ABF's largest business Primark.

"Although we think a demerger should make ABF more investable in the long run, we think ABF's valuation is full given more limited growth prospects over the next few years," it said, hence the downgrade.

RBC said it's concerned that Primark's value for money perception may be compromised by its attempts to elevate its offer.

"Primark lacks a transactional digital offer outside the UK, at a time of accelerated shift online and price competition from Shein," it said. "It also has material exposure to markets e.g. Germany, which have become more promotional due to cost of living pressures on consumers."

Primark aside, RBC said the food business is likely to see a mixed performance this year.

"Twinings has been performing well in recent years, with strong volume growth and a shift towards faster growing categories," it said.

"Ovaltine has seen good results from marketing investments. However, in the US ABF has seen some pressure on cooking oils and bakery ingredients following a period of elevated pricing. Meanwhile, Sugar should improve from H2 but remains a very volatile business with low visibility."

At 1225 BST, the shares were down 3% at 1,861.50p.