Berenberg upgrades Mothercare, expects sentiment to improve

Analysts at Berenberg upgraded their recommendation on shares of Mothercare from 'sell' to 'hold' after its UK arm moved past breakeven and ahead of an expected boost to its foreign operations from a weaker pound.

Since they downgraded the company to 'sell' in April 2016 the stock had fallen by roughly 20%, versus a gain of the same magnitude for the FTSE All Share.

Estimates were now more "reasonable", the broker added.

Furthermore, management had guided towards a further reduction of the company's footprint in the UK from about 150 stores at present to between 80 to 100 over the next five years.

In parallel, now that its pre-Brexit currency hedges had rolled off it would begin to feel the benefit of weakness in Sterling.

Berenberg did take issue with Mothercare's international unit, labelling it a 'black-box'.

"Mothercare’s international franchise business remains a key risk area. The combination of limited disclosure, with an estate of more than 1,000 stores across 55 countries, makes forecasting the division notoriously difficult," the broker's analysts said.

Nevertheless, the weaker pound and a move into underpenetrated international markets might offset any near-term weakness in like-for-likes.

The broker said it expected sentiment towards the shares to improve over coming months and lifted its target price from 100p to 130p.