Broker tips: Next, Smith and Nephew, Sage

Retailer Next got a boost on Thursday as RBC Capital Markets upped its stance on the stock to ’outperform’ from ‘sector perform’ and hiked the price target to 5,500p from 4,800p.

The bank said its proprietary entry price point pricing survey suggests Next has become more price competitive, in particular versus the likes of competitors M&S and Debenhams.

In addition, RBC reckoned that recent strength in the pound against the dollar could lift Next’s gross margin earlier than peers.

“Next typically hedges 9-12 months out in advance, shorter than M&S and Debenhams, who hedge 12-18 months out in advance; as such Next should realise its margin benefit a quarter earlier,” said RBC, noting that Next sources around 70% of its cost of goods sold in US dollars.

“All else being equal, we estimate Next could see a theoretical 130-300 basis points of gross margin tailwind from FX for FY19/20E. We believe some of this margin gain will be offset by higher cotton costs, mix dilution, as well as the need to invest in its product and online propositions, but we now believe Next can sustain its margins rather than seeing a decline.”

Analysts at JPMorgan Cazenove update the investment firm's forecasts on Smith and Nephew (S&N) on Thursday, upgrading the medical technology group's rating to 'overweight'.

JPMorgan moved its target price for S&N ahead to 1,411p from its previous 1,369p expectation after the London-based group saw significant tailwinds from currency moves and recent US tax reforms.

The analysts noted that while they had expected a boost as a result of the changes to US tax laws back in December, S&N's announcement that its group tax rate would fall to 20-21% from its previous figure of 25% was better than they had initially expected.

In regards to the FX upgrade, JPMorgan saw a decent dollar tailwind that led to a 4% upgrade to its revenue forecasts for S&N.

As a result of the moves, JPMorgan felt S&N was ahead of its 2019 full-year revenue forecasts by around 2% and about 8% above its earnings per share targets.

Sage will find it challenging to meet its full-year targets, reckon analysts at Deutsche Bank, after a weak first quarter and growing competition from the likes of Quickbooks and Xero.

DB, which maintained its 'hold' rating and 740p target price, said organic revenue growth of 6.3%, with 7% growth in recurring revenue, was due to "sales execution issues" and subscription growth slowed to 26% from 30% the prior year.

Management, which blamed the shortfall on a training initiative across the sales force which cost around two weeks of lost productivity, reiterated full-year guidance of "around 8% organic and around 27.5% organic operating margin" but said the first half would be closer to 7%, with flat margins year-on-year, which analysts said left the second half "looking particularly challenging".

Estimating the impact of the Intacct and Fairsail acquisitions, along with the US Payments divestment, the analysts add around two percentage points to the top line versus last year's reporting metric, on which Sage managed 5.9%, therefore, organic growth has actually declined by around 1.5pp on an 'apples to apples' basis.

With little detail given by management around Sage One, other than to say that the focus remains more toward ARR than subscriptions, the analysts felt this suggested that recent efforts to increase pricing to more reasonable levels are constraining subscription growth/driving churn, in line with the experience in 2H17.