Primark owner AB Foods was a gainer on Monday after Morgan Stanley advised investors to look beyond slowing like-for-like sales growth.
Concerns about Primark’s slowdown are misplaced as the retailer’s UK market share has recovered since last summer and pressure on margins is likely to prove temporary, the broker told clients.
That Primark stores are still delivering twice the sales densities of H&M proves that the business remains ”fundamentally very healthy”, it said.
AB Foods closed 1.6 per cent higher at £25.40. The stock has slipped 30 per cent from its record high hit in late 2015 after Primark’s like-for-like sales growth turned negative.
“Primark’s value-based proposition means that it needs to be one of the last in the market to raise prices, whilst its hedging policy means that it has been one of the first to see its input costs increase. It is, therefore, at a short-term disadvantage versus peers,” Morgan Stanley said.
“However, we expect this competitive disadvantage to last no more than six to 12 months, at which point gross margins should recover.”
Morgan Stanley’s base case was for Primark to increase profit by 20 per cent per annum in the next two financial years, thanks largely to a margin recovery and space expansion rather than same-store sales growth.
Its bull case, where margins return to historic levels, would deliver 40 per cent profit growth.
Mining stocks underpinned the wider market, lifting the FTSE 100 by 0.3 per cent or 20.17 points to 7,278.92.
FTSE’s large-cap mining index hit its highest in more than two years, having bounced 190 per cent from the 12-year low it set in the first few weeks of 2016.
Rio Tinto gained 3 per cent to £36.80. At a post-results analyst meeting in Sydney, Rio finance director Chris Lynch flagged up the possibility of more generous cash returns because acquisition opportunities are scarce.
Glencore took on 2.6 per cent to 329p with Morgan Stanley upgrading to “equal weight”.
“There is no longer a material difference in Glencore’s financial risk versus its diversified peers,” Morgan Stanley said.
Shire was off 0.8 per cent to £45.59 after a US appeals court reversed a district ruling that Watson Pharmaceuticals, now part of Teva, did not infringe Shire’s patent when applying to clone Lialda, a treatment for ulcerative colitis.
Lialda accounts for about 5 per cent of Shire’s revenue and is due to lose exclusivity in late-2019.
Capita fell 2.4 per cent to 513.5p even after settling out of court a dispute with Co-operative Bank over a £325m mortgage administration contract.
Analysts saw the settlement as in line with guidance given at Capita’s December profit warning with only a small benefit to its stretched balance sheet.
Get alerts on Associated British Foods PLC when a new story is published