Broker snap: Nomura cuts AB Foods to 'reduce'

17th Jun 2013 08:40

Nomura has downgraded its rating for food ingredients and retail group Associated British Foods from 'neutral' to 'reduce', saying that the stock is too expensive now that the profit boom for Sugar and Primark over the past two years is no longer supported.The broker cut its target price for the stock from 1,800p to 1,650p following the reduction in earnings forecasts on the back of a more volatile outlook for profitability, especially in Sugar.Nomura expects earnings per share of 100p in the year to September 2014, down from its earlier forecast of 113.5p, and now stands 6.0% below consensus.The adjusted operating profit estimate has been slashed by £141m for the year ending 2014, mainly due to a £99m cut in the forecast for Sugar (to £338m) to reflect the 25% drop in world sugar prices since the summer of 2012.The broker said: "We see this price indicator subduing the outcome of current negotiations with EU buyers; hence we now assume a 10% price fall for the 2013/14 season starting in October (prior assumptions -4.0%). In addition, persistent falls in China sugar pricing now threaten another loss in FY14 and recent rand weakness is likely to contain profit growth from Africa."Meanwhile, the grocery operating profit forecast has been trimmed by £31m (to £233m) with Nomura saying that previous assumptions about a return to profit in Australia and restructuring benefits in UK/Europe were too optimistic.Some £11m of reduction in group operating profit forecasts is due to small changes to foreign exchange estimates in Retail.Nomura concluded: "The stock outperformance over the past 18 months has relied mostly on a re-rating of Primark based on the 7.0%+ like-for-like (LFL) sales growth in the past three quarters and some margin recovery. This performance boom was owing to the deflationary cotton price and US dollar weakness (supporting accentuated competitive price points and margin). "With cotton and FX trends reversing now, this implies slowing LFL and contracting margins. Space growth is limited by unique store requirements."The stock was down 0.84% at 1,767p by 08:41 on Monday.