Broker tips: Burberry, ABF, Barclays

Luxury fashion's push into online "can change the traditional luxury distribution model", Goldman Sachs thinks, upgrading its recommendation on Burberry's shares as a result.

'E-Concessions' are set to accelerate growth for Burberry and its peers, the investment bank said on Wednesday, modernising the sales channel mix, offering consumers a wide choice and open up luxury’s addressable market to a younger consumer base.

"The economics work," Goldman says, adding sales at a higher incremental margin, leading to a forecast for new channel opportunities and a cumulative sales benefit of €23bn for the wider luxury sector by 2025, with a bias seen towards 'soft luxury'.

With online sales forecast to rise from just 7% today to 16% by 2025, "our estimates may be conservative", analysts said.

Distribution is expected to dominate the sector's strategic updates over the next 12-18 months, with companies more willing than first envisaged to embrace new distribution agreements as e-concessions offer brands the ability to accelerate retail operations, increase traffic and help control the grey market.

"The key risk is greater competition, but this will also accelerate the need to participate, in our view."

Burberry was upgraded to 'buy' from 'neutral' and added to Goldman's 'conviction list' with a new 12-month price target of 2,395p from 1,797p, implying 43% upside potential.

In a world full of companies struggling in the face of structural pressures, Associated British Foods/Primark and Inditex stand out as two firms investors "should generally want" to own over the long-term, Morgan Stanley says.

Nevertheless, while the broker's analysts don't yet see an inflection point ahead for Inditex - in the case of ABF they do - albeit after a 29% drop for Inditex shares and 19% fall for ABF's over the past nine months.

Morgan Stanley highlights the valuation gap which has opened up in shares of ABF, which imply that Primark is being valued at less than 12 times' its calendar year 2019 earnings - as opposed to 20 times' over at Inditex.

"We see Primark as much less mature, so this seems anomalous to us," the broker goes on to say.

Furthermore, the 3000p sum-of-the-parts valuation for ABF still looks appropriate, they add.

Hence, their recommendation for the shares has been upgraded from 'equalweight' to 'overweight'.

On Inditex on the other hand, they stay at 'equalweight', while reducing their target price from €30.0 to €26.0.

Analysts at Credit Suisse bumped up their target price for Barclays's shares on the back of the positive impact from recent tax reforms in the States.

That, they said, meant the lender's return on tangible equity would be 0.7% and 0.8% higher in 2019 and 2020, at 9.6% and 9.9%, respectively, although headwinds from foreign exchange markets would knock 3% off the group's earnings per share growth.

Their estimates for growth in adjusted earnings per share from 2018 to 2020 thus saw a lift of 11%, 4% and 3%, respectively, and their target price from 230p to 240p.

With 17% left to their revised target price, they also reiterated their 'outperform' recommendation.

Higher interest rates might drive further revenue upside, they said, while cost savings could surprise positively.

Through to year-end 2020, the broker also lifted its estimates for the lender's common equity Tier 1 capiatl ratio by between six tenths of a percentage and a full point.

That was despite having increased their estimate for the charge arising from litigation with the US Department of Justice from £1.0bn to £1.5bn.