Broker tips: AB Foods, Tate & Lyle, James Fisher

Analysts at Deutsche Bank lowered their target price on Primark owner AB Foods from 1,850.0p to 1,575.0p on Monday, stating "reality" was now dawning.

Deutsche Bank noted that AB Foods had lowered expectations for the 2023 trading year, largely on lower Primark margins due to "mounting pressures" on consumer income limiting the ability to pass through to input costs, foreign exchange woes, and energy cost inflations to consumers.

"Our cautious view on the stock was driven by a fear of weaker sales from the squeezed lower income demographic and we assumed the retailers would protect margins with price increases," said DB.

"The decision to not pass through all of the inflation may lead to share gains for Primark and reflects the longer-term stance taken by management. We now assume a 7.5% EBIT margin, which is down circa 150 basis points year-on-year."

The German bank now forecasts Primark like-for-like sales to be down 3% on its overall assumption of a roughly 5% drop in real incomes.

However, DB stated that whilst the shares took another leg down on the profit warning, it thinks much has now been incorporated into the stock's valuation and reiterated its 'hold' rating on AB.

Tate & Lyle slumped on Monday after Jefferies downgraded the shares to 'hold' from 'buy' and cut the price target to 780.0p from 880.0p as it highlighted mounting cost pressures in Europe.

Jefferies noted that Europe is now a more material market for Tate, meaning it’s exposed to "soaring" inputs.

The bank said it reckons Tate will need more than 20% increases for CY23 contracts in Europe, the materiality of which has increased, post-spinning US primary into the Primient joint venture.

"Relative exposure to the tricky European market has increased post-separation," it said. "We think Europe is circa one-third of FBS (Food & Beverage Solutions) sales by origin & perhaps 45% by volume: a result of the semi-exit from circa £1.8bn of US Primary sales while retaining c. £100m of Primary in Europe, alongside circa £300.0m of speciality.

"Compounding the problem is that corn & gas are respectively 1.25x & 2.5x more expensive in Europe, even in more normal times. But now European corn & gas prices are ahead 60% & 85% on estimated CY22."

Analysts at Canaccord Genuity lowered their target price on marine engineering services provider James Fisher from 625.0p to 550.0p on Monday, citing cyclicality as their primary concern.

Canaccord Genuity said James Fisher's business mixed multiple end markets - oil & gas, renewables, defence, nuclear, and civil - and highlighted that the past two years had been "challenging" for the group, with significant falls in margin, principally due to lower project activity due to the Covid-19 pandemic, certain sanctions-related impacts, and a number of internal goals.

However, the Canadian bank believes much of the difficulty has now been put behind the group, and that all of its key markets were now getting stronger over the next 12 months.

In addition, Canaccord also highlighted that Fisher generates a "significant part" of its revenue in USD and NKr, and said it also expects strength in USD to act as "a material tailwind" in the second half.

"Stronger earnings will go a long way to addressing concerns around the group's balance sheet; we expect peak net debt to be reached at the end of this year at 2.6x EBITDA, and for free cash flow to be strong enough in 2023E to reinstate the dividend," said Canaccord, which reiterated its 'buy' rating on the stock.

"We are cutting earnings, and our target to 550.0p (was 625.0p), but we are increasingly confident in the outlook for Fisher given the cyclicality of its end markets."