RBC sets a new price target of 2,300p, versus the current price of 2,004p.
“ABF has been left behind in the recent sector rally, yet the prospects for its two main businesses are improving,” RBC analyst Richard Chamberlain said in a note.
“We think Primark’s low prices provide a barrier to entry versus online players, and grocery is delivering double-digit profit growth.”
In terms of valuation, RBC noted that around 5% of the market cap can be accounted for by cash and otherwise the implied valuation of Primark looks undemanding.
“ABF has a strong balance sheet with over £750mln in net cash, excluding lease liabilities,” Chamberlain said. “This gives it potential to recommence dividend payments now that the outlook has stabilised from earlier this year.
“On a sum-of-the-parts basis, we estimate the implied FY21 P/E for Primark is c.15x, which we think is undemanding for a best-in-class value retailer, with good international prospects.”
The RBC analyst slightly increased its forecast for earnings in 2021, driven by the expectations for improved Primark margins. Moreover, 2020 financial year profits at Primark could reach the top end of current guidance, set at £300mln to £350mln.
Significantly, RBC sees Primark as well-positioned for the downturn in consumer spending as its lower price clothes retail stores capture greater market share compared to more pricey high street competitors.
“Our latest apparel pricing survey shows Primark is maintaining its price leadership, and its EDLP strategy acts as a barrier to entry against online competition,” Chamberlain added.
“Primark is also more on the front foot on ESG (ethical, social and governance) initiatives, eg, not taking additional furlough money, introducing a recycling scheme and committing to pay for outstanding finished goods and suppliers’ fabric liabilities, with an order book of £1.2bn (up from £1bn in July), which we think is a sign of confidence in the outlook.
“Margins next year should be supported by a weaker USD and near term by low markdowns.”