Broker tips: JD Sports, Next Fifteen Communications

Exane BNP Paribas initiated coverage of JD Sports at 'outperform' with an 830p price target on Friday, arguing that it's a rare growth retailer in the UK.

"JD is the only FTSE 100 retailer in the UK, aside from Ocado, to enjoy material growth prospects," it said.

With more than 430 sports-fashion shops in the UK & Ireland, the company is physically fully mature in its home market, it said. However, online is adding growth incremental to the stores and JD's profitable presence with its eponymous chain in both Europe and Asia suggests the potential to triple its existing store base.

Exane said store openings still make sense.

"The company achieves gross profit densities more than double its peers and continues to post strong in-store like-for-like sales growth driven by share gains and the rise of the athleisure culture."

The bank expects operating margins to rise as international scale builds, driven by increasing sales densities, accretive apparel mix and more localised logistics. It also said that UK outdoor assets, which are relatively small but currently loss-making, also have the potential to become profitable with the implementation of centralised logistics.

The "big prize", however, lies in the US, where Finish Line’s 520 stores saw margins decline for six straight years under prior ownership, Exane said.

It said upside risks include a favourable decision from the UK Competition and Markets Authority on the acquisition of Footasylum, while downside risks include a sharp consumer slowdown, perhaps possibly triggered by an unfavourable Brexit outcome.

Analysts at Berenberg lowered their price target on digital marketing firm Next Fifteen Communications from 680p to 630p on Friday following the group's mixed interim results.

Next Fifteen saw sales grow 11% in the first half of 2020, but organic growth slowed to a "disappointing" -1.3%. However, Berenberg noted that the company's poor performance could be explained by losing a £2m contract with Samsung and a £4m deal with Just Eat.

"While the former stemmed from a decision by Next15, the latter resulted from a change in CEO and senior management leading to a new marketing strategy and partners," said Berenberg, which pointed out that excluding those two client losses, group organic growth was roughly 5%.

Despite the mixed results, the German bank, which reiterated its 'buy' rating on the firm's shares, said underlying trends indicated that Next Fifteen should be able to return to "at least high-single-digit organic growth" in the 2021 trading year.

With margins continuing to expand as well, Berenberg said it remained positive on the medium-term equity story, particularly with the group now trading on just a 12.5x full-year price-to-earnings ratio - a 20% discount to its average historical valuation.