Investing.com — Morgan Stanley (NYSE:MS) has downgraded Associated British Foods (LON:ABF) (ABF) to an “underweight” from an “equal-weight” rating, citing various macroeconomic and sector-specific concerns. 

Shares of the company were down 1.9% at 08:55 ET (13:55 GMT).

In a note dated Tuesday, the brokerage flagged risks to ABF, particularly its Primark division, as key factors influencing the downgrade.

The analysts at Morgan Stanley point to slowing growth in disposable income across the UK as a significant challenge. 

Their proprietary household cash flow model forecasts that growth in consumers’ disposable income will decelerate to 1–2% year-over-year in FY26, a decline from the 7–8% seen in recent years. 

This slowdown is expected to disproportionately impact lower-income households, a demographic that constitutes a substantial portion of Primark’s customer base. 

With 85% of Primark’s products priced under £10 and nearly half of its revenue generated in the UK, the retailer is particularly vulnerable to these economic pressures.

Additionally, Primark faces intensifying competition from online value-oriented retailers. While the brand has made strides in digital enhancements, such as click-and-collect services and inventory tracking, its lack of a transactional e-commerce platform leaves it at a disadvantage as online market penetration in the UK is projected to rise again. 

Primark’s market share in the UK, which had shown gains post-pandemic, has now plateaued, reflecting these challenges.

Morgan Stanley also flagged risks to Primark’s operating margins. After a recovery to pre-pandemic levels in FY24, margins are projected to decline due to several factors. 

These include operating leverage challenges amid lower sales volumes, currency headwinds from a strengthened US dollar affecting costs, and increased investment needs for maintaining competitiveness and driving growth. 

Primark’s margins are forecasted to fall below consensus estimates, with Morgan Stanley projecting 11.4% for FY25 and 10.4% for FY26.

Given these headwinds, Morgan Stanley has revised its price target for ABF to 1,900 pence, representing a 5% downside from the current levels. 

The brokerage has lowered its target price for ABF to 1,900 pence from 2,550 pence, expressing concern about the company’s medium-term prospects. They believe that the current economic climate and ongoing industry transformations could impact ABF’s performance.