UBS cuts AB Foods to 'neutral' on valuation, removes from 'key call' list

6th Aug 2015 11:06

(ShareCast News) - UBS downgraded Associated British Foods to 'neutral' from 'buy' and removed the stock from its 'key call' list, saying the valuation now reflects near-term US upside, but raised the price target to 3,180p from 3,050p as it rolls forward its estimates.It said the success of Primark's upcoming US entry is critical to the current investment thesis, adding that with near-term cyclical challenges such as gross margin pressure and operational challenges in Sugar, the risk/reward is balanced.With Primark's entry into the US imminent, UBS took a look at potential scenarios around the openings.The bank's upside scenario, based on Primark's successful roll-out in Germany, suggests US sales could reach £345m by year 7, with a 1% market share, or around 15% of the current market cap. It said that should the US entry prove unsuccessful, there is limited downside."We estimate exit costs of less than 1% of the market cap, given the leasehold nature of the agreements, and hence the US opportunity is a risk worth taking in our view."UBS said the fundamental attractions of Primark remain, with the brand still relatively underpenetrated in Europe.At 1112 BST, AB Foods shares were down 1.4% at 3,193p.