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(Sharecast News) - Analysts at UBS downgraded Primark owner Associated British Foods from 'buy' to 'neutral' on Wednesday, stating setbacks at the fast fashion retailer had forced it to move to the sidelines.
UBS stated that it made the move following AB Foods' pre-close update for three reasons - the first being group adjusted operating profit cuts of 3% and 14% for 2022 and 2023, respectively, driven mainly by the Primark downgrades of approximately 8%-27% and grocery downgrades of about 10%, offset in part by upgrades in sugar.
The Switzerland-based bank also stated that while it expects Primark to bridge back to roughly 10% margin over the mid-term, the margin profile over that time was below its prior expectations.
Finally, UBS also flagged higher capital intensity, raising its estimates for Primark's capex and working capital requirements over the forecast period, which led to a lower valuation for the division both in its discounted cashflow and sum of the parts assessments.
"We think Primark is likely to emerge in a stronger competitive position in the midterm following this decision not to raise prices beyond what is in the pipeline for Spring/Summer next year. But we expect the shares to perform in line with market until there is evidence of some progress on sales/margin trends," said the analysts, who also cut their target price on the stock from 2,300.0p to 1,450.0p
"With limited potential upside to our PT and an apparent lack of catalysts, we cut our rating to 'neutral'."
Reporting by Iain Gilbert at Sharecast.com
