Deutsche Bank sees scope for ABF to increase dividend payout ratio

1st Aug 2016 11:51

(ShareCast News) - Deutsche Bank bumped up its recommendation and target price on shares of Associated British Foods.The near-term outlook for the company was "positive", analysts Warwick Okines, Jaina Mistry and Charlie Muir-Sand said in a resaerch note sent to clients after the close of trading in London on 29 July.They referenced improving sugar prices, recent moves in foreign exchange markets and flexibility in the company´s balance sheet as the reasons for hiking their target price from 3,000p to 3,200p and lifting their recommendation from 'hold' to 'buy'.The analysts also said the company´s fashion arm, Primark, was continuing to power ahead for the long-term, thanks to its price leadership and "significant" room for growth in Europe and Stateside."Our benchmarking confirms Primark´s model is hard to replicate. It can afford to sell at less than half the price and make less than half the profit per garment as H&M because its volume densities are so high. Despite its low prices it makes the same profit per sq ft as Inditex. With similar capex spend per sq ft and a longer growth runway, Primark is very well positioned," they explained.Shares in ABF were not inexpensive, they added, but following three years of almost no growth in the firm´s earnings per share they believed the stock might be reaching an inflection point.On their estimates, the firm´s EPS were set to expand at a compound annual growth rate of 13% to 2019.Over half of the group´s profits came from outside the UK and its balance sheet was the strongest that it had been in a decade; so much so that Deutsche Bank saw scope for the company to raise its 35% dividend payout ratio.ABF stock had underperformed both the Footsie and the second-tier index since the referendum vote, the analysts pointed out.Yet it was trading at 24 times forecast earnings for calendar year 2017, close to its global peers.Deutsche Bank´s target price was based on a sum-of-the-parts valuation method.