RBC cuts AB Foods to 'sector perform', says valuation up with events

23rd Jun 2015 09:27

RBC Capital Markets downgraded Associated British Foods to 'sector perform' from 'outperform' saying the valuation is up with events."We continue to think Primark offers investors a relatively rare early stage international roll-out story. However ABF is lacking earnings momentum, the US apparel market remains very competitive and we see more valuation upside for some other stocks in the sector," it said.It said that while Primark should be able to grow space at a mid-teens rate, driven by expansion in mainland Europe and, from later this year, the US, like-for-like trends are likely to remain subdued against tough comparisons.Although the dollar has weakened recently versus sterling and the euro, Primark margins will be under pressure from higher markdowns in 2015 and from currency in 2016, said RBC.It said the US is an exciting opportunity but it's likely to be a drag on margins. It will take time to achieve critical mass there and the experience of H&M and Inditex shows that Primark will have to adapt its offer significantly over time, said the broker."The US market remains very competitive with generally lower sales densities and higher markdown ratios and as such we expect it to be a drag on Primark's margin for several years."At 09:33, AB Foods shares were down 0.9% at 3,067p.