Broker tips: N Brown, Burberry, BT Group

Broker Peel Hunt downgraded N Brown to 'reduce' after the specialist fit clothing retailer ran into challenging conditions in the new financial year.

Final results were also slightly disappointing, with profit before tax of £84.5m, which was below the broker's £86.2m estimate, though the dividend of 14.2p was held steady.

The operator of the Simple Be, Jacamo and JD Williams retail fascias then said sales had slowed year-on-year since March and warned of a £3m hit to full year profit before tax from currency headwinds.

For the new financial year, the company gave guidance that product gross margin would fall between 50-150bps driven by buying in gains, more than offset by FX headwind, clearance of aged inventory and tactical price activity to drive share growth in a challenging market.

Financial services gross margin guidance was for a +50bps to -50bps, with the ongoing improvement in the credit book broadly offset by the impact of new customer recruitment.

Group operating costs are expected to be up 2% to 4%, with depreciation and amortisation of £29-30m, net interest of £8-9m, capex of £38-40m, a tax rate of circa 20% and exceptional costs of circa £2m linked to the ongoing tax disputes with HMRC.

Peel Hunt said taking lower gross margin guidance and cutting its sales estimates, it expected to downgrade PBT in the new 2017 financial year by at least £10m to £81.1m, resulting in 23p earnings per share.

"The shares offer a decent yield, nearing 5%, but are struggling to get traction, we find ourselves downgrading forecasts again with little confidence in the turnaround," analysts said.

Goldman Sachs downgraded Burberry to ‘neutral’ from ‘buy’ and cut the price target to 1,550p from 1,690.8p.

It noted the shares are up 93.1% versus the FTSE World Europe up 21.3% since it added the stock to its ‘buy’ list in May 2010.

“Given the lack of improvement in growth momentum and uncertainty over costs, we expect limited near-term upside for the shares.”

GS said while the deterioration in like-for-like trends to -5% in the fourth quarter from +1% at the nine-months mark is representative of a tougher luxury demand environment due to declines in tourist spend in Europe and weak demand in the US, the latest pre-tax profit guidance for FY17 of around £405m suggests more severe operating deleverage.

“While we believe Burberry’s differentiated brand, growth and digital strategy will continue to drive top-line outperformance relative to its peers over the medium term, this strategy will continue to weigh on profitability particularly given the tougher trading conditions expected in the near term.”

The bank said given the fundamentals, the current valuation of 19x on its new estimates for full year 2017 price-to-earnings offers limited room for a re-rating. Still, the potential for a Burberry takeout remains, said GS, which assigns a 30% probability within its M&A framework.

Jefferies downgraded BT Group to ‘hold’ from ‘buy’ and cut the price target to 475p from 515p, pointing to impaired visibility.

The bank said BT's outlook is increasingly uncertain, with more elements outside management control.

Jefferies said the positive stance it had established on the stock back in 2010 was founded on benign regulation - helping BT regain consumer retail momentum - and substantial cost-cutting.

“With neither support looking so reliable now and valuation no longer cheap, we downgrade,” it said, adding that Vodafone is its preferred UK telco.

Jefferies said Ofcom’s attitude towards BT appears increasingly abrasive. Demands in last month’s Business Connectivity Market Review for tougher minimum service standards and a new dark fibre reference offer will load Openreach with more cost.

At the same time, Ofcom’s Cost Attribution Review will reduce the cost base on which it is entitled to earn a return.

Jefferies said Ofcom’s Digital Communications Review proposals were still a threat.

“Although initial conclusions fell short of demanding structural separation, the “independent governance” that Ofcom seeks for Openreach might extend to giving it control over cash flows that contribute significantly to BT’s dividend capacity.”

The bank noted Openreach contributed 36%-41% of group operating cash flow in the last four years.