Societe Generale highlights buying opportunity at Primark owner AB Foods

13th Oct 2014 12:16

The recent pullback in the share price of Associated British Foods (ABF) presents an opportunity for investors to buy into the growth story at low-cost fashion retailer Primark, according to Societe Generale.The French bank has upgraded its stance on the food and retail group from 'hold' to 'buy' following a 25% drop in the shares since early July which has left the stock flat over 2014.Socgen said there were three factors behind the recent slump: a slowdown in like-for-like (LFL) sales growth at Primark from 8% in the third quarter to around 2-3% in the fourth quarter, a de-rating of the clothing retail sector and a further deterioration in sugar prices.The bank said it had been concerned about the implied valuation of Primark, "which we felt was 'frothy' above 3,000p". However, recent falls in ABF's stock mean that the division is now valued at 14 times operating profits, from a multiple of 18 previously."Our long-held view is that Primark is one of the best structural growth stories in staples. [...] We remain confident that the slowdown in the fourth quarter is temporary and we forecast another year of 4-5% LFL growth in 2015," Socgen said.Depressed sugar prices will likely hold back group earnings in 2015, but 2016 should be the first year since 2010 that all four of ABF's key divisions - Primark, sugar, grocery and ingredients - will show profit growth at the same time, the bank predicted.Socgen left its 2,950p target price unchanged for the stock, which was trading 0.6% higher at 2,503p by 12:44 on Monday.