Goldman Sachs turns buyer on this FTSE 100 share

The year-to-date hasn’t been easy for Associated British Foods as concern about its sugar business has dented the share price. But losing 17% of its value since the New Year has provided an attractive entry point, says Goldman Sachs, underpinned by Primark's launch in the US this autumn. Demand in America for "fast fashion" should drive rapid growth in profits and is enough to convince Goldman to upgrade its rating on the shares from 'sell' to buy'.

Responding to the needs of price-conscious millennials, Goldman reckons the new US stores will add £720 million to operating profit by 2020, adding clout to AB Food's long-term growth story. It sees Primark mirroring H&M's expansion across the pond, which cut the ribbon on around 25 new stores each year between 1997 and 2005. Goldman reckons Primark will open 20 a year, without dropping the ball on its European expansion.

Fast-forward to 2020 and Primark will likely account for 80% of AB Food's earnings, versus 55% today. Sales are forecast to swell by three-quarters to £22.8 billion, generating pre-tax profit of £2.1 billion. Heavy investment and near-term headwinds are set to hurt short-term profits, however, with the broker forecasting a 9% drop to £927 million in 2015, giving earnings per share of 95.3p.

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AB Foods has jumped 166% since being placed on Goldman's 'sell' list in 2010, outperforming the FTSE World Europe's growth of 29%. It’s now trading on 28 times forward earnings, which is expensive, but Goldman argues that since the end of last year the stock has de-rated by 20% on a relative basis versus the consumer staples sector. Concerns about its weaker sugar business and dollar pricing model are also already priced in.

But the skies ahead aren't clear just yet, and investors should look out for competition in the online space where Primark is glaringly absent, a rise in demand for socially responsible clothing, and strength in the US dollar.

"We value ABF on a SOTP [sum of the parts] methodology with an implied blended target P/E multiple of 28x, applied to our CY16 earnings estimates, giving a 12m price target of 3120p (from 2755p). ABF trades on 28x 12m fwd P/E, a 30% premium to the sector, representing a 20% de-rating since December 2014."

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