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FTSE ending week on a strong note but Primark owner ABF misses out

Discussion in 'Market News' started by Lily, Oct 16, 2015.

  1. Lily

    Lily Forum Member

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    Associated British Food falls as SocGen cuts rating on valuation and US risks

    Leading shares are ending the week on a strong note, with investors buoyed by continuing hopes that the US Federal Reserve will refrain from raising interest rates this year.

    The FTSE 100 is up 39.15 points at 6377.82, but is still on course for a slight loss over the whole weak (currently down 0.6%). Weak US consumer price figures added to the feeling there would not be a rate rise this year, while a fall in jobless claims also suggested the country’s economy was not slowing down too dramatically.

    Yesterday, ABF’s chief financial officer John Bason, and head of Primark Paul Marchant, hosted an analyst trip to Madrid, ahead of the opening of Primark’s flagship store in Spain. Primark has been in Spain for a decade (its first European location) yet it is only now that it has opened in a prestigious high street location in Spain, illustrating just how much runway Primark still has in Continental Europe. Located on Gran Via - the Oxford Street of Madrid – it is situated next door to H&M. At 132,000sq ft, it is the second largest store in the entire Primark estate and is the 41st in Spain and 6th in Madrid. Primark has been a huge success story in Spain with a 9% volume share (more than 300 basis points more than #2 player) in a very fragmented market. Cannibalisation could be a short term issue in Spain (as it has been recently in Germany and Holland) but it’s not something we consider to be a fundamental concern.

    We are downgrading on valuation as it has hit our £33 target price. ABF trades on 33 times 2016 PE which implies around 40 times for Primark and 20 times EBITDA implied in our sum of the parts. We continue to think Primark will compound with like for like growth averaging 2-3% per annum and double digit space growth, but this is now fairly reflected in valuation. We also confess to being a little nervous about its US debut. Inevitably there will be many lessons to learn as the Primark brand is not known in the US and it will take time to gain traction. We see the potential in North East US and Primark’s ‘pull model’ means its learns quickly, but we think the roll-out programme beyond its initial 8 US locations is likely to be slow and steady. Early comments that it has been a little surprised by customer shopping patterns (Sundays busier than Saturdays) and the uniqueness of every location suggests it’s very much in learning mode. This isn’t in anyway a surprise, but does suggest there could be some ‘growing pains’ in the US. ABF will update on its debut in the US at its 2015 results in November.

    The Icap share was a strong outperformer between January and May but since then has come off and is now only up 1% year to date (versus FTSE Allshare down 3%). Our analysis of Icap’s electronic volumes shows weakening trends in recent months contributing to this. Volume comparisons get tougher from September 2015 onwards and the European Investment banks are continuing to shrink their FICC [Fixed Income, Currencies and Commodities] divisions. With Icap management suggesting its cost response is likely to be limited to support function rationalisation and slowly lowering comp. ratios, we believe the earnings per share recovery story is stalling. We cut our rating to equal weight and target price to 500p [from 600p], reflecting lower earnings per share estimates and raised discount rate to 10.5%.

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