AB Foods: ‘The Primark Margin Recovery Story Has Played Out’

Despite opening lower in Tuesday's session, Associated British Foods (LON: ABF) shares have recovered after the stock was downgraded to Sell from Hold at Deutsche Bank.

The investment bank's analyst Adam Cochrane also cut his firm's price target for the FTSE 100 company to 2,190p from 2,290p.

After opening at 2,437p a share on Tuesday, the stock closed down 0.6% at 2,425p. At the time of writing on Wednesday, it is up 0.5% at 2,511p a share. So far this year, ABF is up 5.5%.

“We see the factors driving the 2024 earnings upgrades are reversing as we look into 2025,” Deutsche stated.

Furthermore, Deutsche Bank believes “the Primark margin recovery story has played out” due to a lack of like-for-like leverage and increased investment.

As a result, the bank is adopting a more cautious stance on the shares as AB Foods' profit recovery phase has concluded. The bank also cited profitability in the sugar division as another factor driving its downgrade, stating that it is set to fall, while the grocery business is expected to give up some of its margin gains.

In February, Morgan Stanley downgraded Associated British Foods to Equal Weight from Overweight with a 2,500p price target, telling investors that volume growth will be the primary theme for European retailers in 2024. As price inflation moderates, Morgan Stanley said it expected sales growth to become increasingly reliant on volumes.

Overall, analysts remain mostly bullish on ABF shares. According to TradingView, six analysts covering the stock currently have a Buy rating on ABF, while three have a Hold rating, and one has a Sell rating on the shares.

The average price target is 2,815p, representing a potential 12.2% upside for ABF.