Proactive Investors - Investment bank RBC Capital Markets recently raised its price target for Associated British Foods PLC (LON:ABF) from 2,300.00 to 2,350.00, citing its robust recovery in sales and the potential for margin improvement in the 2024 fiscal year.
ABF's largest business, Primark, has a strong presence in Europe and the US and continues to be a leading value player in the UK retail space.
RBC analyst Richard Chamberlain explained that the company expects strong sales recovery given the ongoing revival of store-based retailing. This is anticipated to result in robust margin improvement in 2024.
In addition, Primark is expected to witness margin improvement over the next year due to a favourable freight environment, potentially providing a tailwind for ABF in the second half of the fiscal year.
ABF's food business also shows promise, with the grocery sector expected to pass through more cost inflation in the second half of the year, while the ingredients division is witnessing robust structural growth.
Challenges currently affecting the profitability of ABF's sugar business, such as reduced British Sugar production volumes and increased costs, are expected to be temporary. Profits are projected to improve next year due to firmer pricing and improved performance by Vivergo, ABF's bioethanol business.
To evaluate the investment potential of ABF, RBC uses the lower of a discounted cash flow (DCF) and a sum-of-the-parts analysis.
For the DCF, the bank modelled a 10-year sales compound annual growth rate (CAGR) of 5%, earnings before interest and tax (EBIT) CAGR of 7%, and free cash flow (FCF) CAGR of 16%.
Given ABF's global reach and international growth potential, RBC employed a weighted average cost of capital (WACC) of 8% and a terminal growth rate of 2.0%.
The sum-of-the-parts analysis provided a fiscal year 2023 estimated price-to-earnings (P/E) multiple of about 18 times for Primark.
RBC valued the grocery and ingredients divisions favourably but noted risks to the rating and price target include a weakening of footfall to Primark stores, a downturn in Primark's margin outlook due to higher purchasing costs, lower-than-expected grocery sales growth, and weaker-than-forecast sugar profits.
RBC repeated its 'outperform' rating on ABF (flat at 1,986p) and sees the company as a high-potential investment with a projected 18.6% all-in return. The consensus price target is 2,153p.