Associated British Foods Plc (ABF), the owner of the Primark discount-clothing chain, fell the most in almost nine months after Credit Suisse Group AG said it’s unlikely Primark’s profit growth can continue at the pace seen in the first half.
The shares declined as much as 3.1 percent in London, the biggest intraday fall since July 23, and were down 2.4 percent to 1,820 pence at 11:34 a.m. local time. The volume of shares traded was half the three-month daily average. The stock was the fourth-worst performer in the benchmark FTSE 100 Index (UKX).
ABF has almost doubled in value since March 2011 on growth at Primark and improving grocery margins. The London-based company said Feb. 25 that earnings per share for the six months ended March 2 would be “substantially ahead” of last year.
“It is very easy to get carried away with ABF estimates,” Credit Suisse analyst Charles Mills said in a note today. “The nature of ABF is swings and roundabouts. It would be a truly exceptional few years were everything to go right.”
Mills, who downgraded the stock to neutral from outperform, raised his 12-month price target for the shares to 1,850 pence from 1,650 pence, saying the “shares look due a pause for breath.”
Primark is trading at almost 14 times estimated earnings before interest, taxes, depreciation and amortization, a higher valuation than both Inditex (ITX) SA, owner of the Zara brand, and Hennes & Mauritz AB (HMB), Mills said. Inditex and H&M are both rated underperform by Credit Suisse.
It is doubtful whether Primark same-store sales growth of 7 percent in the first half can be sustained, while ABF’s losses on its sugar operations in China are increasing, Mills said.
Societe Generale analyst Warren Ackerman cut his rating on the stock to hold from buy on April 11, saying the outlook for Primark and ABF’s sugar business looked tougher.
In a note titled “Time for a Breather After Stellar Outperformance,” Ackerman, who raised his price target to 1,900 pence from 1,820 pence, said he remained fundamentally positive on ABF as Primark could quadruple profit to 1.5 billion pounds ($2.3 billion) by 2022.
ABF is set to report interim results on April 23.
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