With the market roaring away after a positive response to new banking rules and better than expected Chinese production data, a 3% fall in Associated British Foods' shares really stands out.
Investors have turned cautious after the company reported a slowdown in sales at its Primark retail chain over the summer. Like for like sales amounted to 4% in the fourth quarter, down from 8% in the first half, meaning full year sales were expected to grow by 6%. Traders said this was a concern, since Primark's low-cost range should have continued to attract customers in these straitened times. So with the shares rising nearly 30% in the past year, investors have used the news as an excuse to take profits, and they have fallen 32p to £10.56. Despite the Primark news overall profits are expected to show "very good progress", the company said. Richard Curr, head of dealing at Prime Markets, said:
Make no mistake, by any standards this is a storming performance from Associated British Foods, with very very good numbers from Primark and a reassuringly solid performance and outlook from the sugar business. However, ABF shares have risen a massive 28% in the last year, way outperforming the sector, and as a result the group now trades at a significant premium to rivals. With slowing fourth quarter sales at Primark, and margin pressures flagged up for next year, Prime Markets believes the time is ripe for a period of consolidation. We view Primark shares as a trading sell into strength, with 4-week target price of 980p.
ABF's trading statement remains upbeat, despite the tough trading environment. We are upgrading our earnings per share forecast by another 3%, and now expect a remarkable 21% earnings growth for 2010, with the increase driven by Primark, where we now forecast 33% profit growth for the year. We are increasing our 2011 forecasts as well, but are mindful of wheat cost inflation and pressures on Primark's margin. ABF was our top-pick large cap stock at the start of the year, and the shares have risen by an impressive 32% versus a flat market. While we are increasing our price target from 1060p to 1125p, we think the shares are due a pause for breath and move from buy to hold.
