Broker tips: Marks & Spencer, Tesco, SIG

Citigroup upgraded Marks & Spencer to ‘buy’ from ‘neutral’ and lifted the price target to 365p from 325p as it said downside was limited and the UK strategy presents upside.

The bank said that while it remains cautious about the company’s strategy to sustainably reignite sales growth, it has become more confident about delivery on the UK store plan and sees opportunity on central cost savings.

In addition, Citi highlighted encouraging signs around full price clothing sales and said that despite the increased cash costs, the free cash flow yield is 6.5% in FY18E and 11% in FY19E, with a dividend yield of 6%.

“With the stock down around 7% since the strategy update, investor concerns look overdone.

“Our buy rating is predicated on MKS being able to deliver on its strategic elements whilst maintaining its returns within the Food business. But we see limited downside to the shares at this level and upside from potential upgrades of around 25% over the medium term if MKS delivers.”

The bank kept its full-year 2017 pre-tax profit estimate at £608m but lifted its estimate for FY18 by 4% to reflect half the benefit from the International loss elimination.

Citi said the investment case for Marks is not without risks and it sees more value in the likes of Dixons and Pets at Home, both of which it rates at ‘buy’.

HSBC upgraded Tesco to ‘buy’ from ‘hold’ and lifted the price target to 260p from 195p, saying the recovery has gained pace, with sales and market share up.

When the bank downgraded the stock back in July, it was due to worries that ASDA might undertake a major price repositioning. While it still expects ASDA to get more aggressive on price, it pointed out that the pace of the Tesco recovery is increasing, meaning it is better able to cope with whatever ASDA throws at it.

“Volumes, cash sales and market share are all improving. At the same time, the company is keeping a tight control on costs to ensure the high contribution margin of extra sales falls through to the bottom line, allowing further investment in price. This momentum gives Tesco firepower to defend against ASDA or to fund its own pricing initiatives.”

HSBC expects Tesco to be highly cash generative by 2020, with a UK operating margin of around 4%.

“At this point, we expect the industry will be back to equilibrium, with Tesco having proved the long-term winner.”

Canaccord Genuity downgraded SIG to ‘hold’ from ‘buy’ and cut the price target to 99p from 130p following the company’s profit warning and announcement of its chief executive’s departure last week.

SIG said on Friday that it now expects underlying pre-tax profit for the year ending 31 December to be between £75m and £80m, which is down from £87.4m last year and below consensus estimates of £90m. It attributed the expected decline in part to weaker-than-expected trading conditions since the EU referendum.

As a result, Canaccord has cut its forecasts and now expected 2016 pre-tax profit of £77m, down from a previous estimate of £95m followed by £78.5m in 2017, down from a previous estimate of £102m. In addition, the brokerage said it cautious the group will manage to retain its incremental cost savings.

“Until there is more visibility on both trading and the plans of a new management team, we find it difficult to see a compelling investment case, other than acknowledging the potential to extract better growth and returns.

“The UK macro outlook for 2017 continues to look uncertain and SIG is going into 2017 with relatively high leverage (around two times), significant exposure to weaker commercial work, a senior management team in transition and a very competitive landscape.”