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Morgan Stanley downgrades Primark owner

Morgan Stanley downgraded Primark’s parent company Associated British Foods (ABF) from an “overweight” to “equal weight” asset after taking “a fresh look” at the clothing retailer’s operations.

A trading note yesterday said the investment bank still viewed Primark as “a great business with attractive long-term growth prospects”, but it admitted it was becoming worried about stagnating like-for-like growth.

“We continue to view Primark as one of the best, most competitively, advantaged retail businesses we cover,” the statement read. Primark accounts for 80% of ABF’s “enterprise value”.

It continued: “Its volume-driven ‘discounter’ model enables it to offer selling prices far below those of most peers whilst still generating attractive returns on capital.

“We, are, however, increasingly concerned by the like-for-like slowdown reported over the last 18 months. With Kantar data suggesting that trading momentum in the UK has weakened further recently, we now expect -1% like-for-like sales for the second half of the financial year.

“This means we now expect like-for-like sales to be negative for the year as a whole – something that we have not seen from Primark in more than 15 years.”

Morgan Stanley admitted it was “not entirely sure” why growth had stalled so dramatically. But it went on to say it had concerns that “structural factors” may be at least partly to blame.

As a result of these concerns the bank has downgraded the value of ABF from £22.2bn to £15.1bn. Subsequently the share price target has been reduced from 3500p to 2650p.



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