Near-Term Weakness for Primark Does Not Change our Long-Term Outlook; Shares Attractive

No-moat Associated British Foods’ fiscal 2022 trading update delivered few surprises regarding the current fiscal year’s results (the 52 weeks to Sept. 17, 2022). However, updated guidance for fiscal 2023 included an expected hit to Primark’s EBIT margin—of a sizable 200 basis points as heady inflationary pressures come to bear on Primark’s cost base near-term—sending shares lower on the day. While we’ve adjusted our fiscal 2023 forecast to reflect the near-term profit squeeze, we maintain our mid-term outlook and our fair value estimate of GBX 2,200. Consequently, we view the share price reaction as excessive. Following share price weakness, Associated British Foods shares screen at an attractive 39% discount to fair value.