BofA ML upgrades Burberry on weak sterling, valuation

Fashion house Burberry racked up healthy gains on Wednesday as analysts suggested it would benefit from sterling weakness.

Bank of America Merrill Lynch upgraded the stock to ‘buy’ from ‘neutral’ but cut the price target to 1,250p from 1,400p to reflect a higher market risk premium and the broad de-rating of the market.

“GBP weakness has created a significant tailwind, which we think is yet to be reflected in consensus earnings or its valuation,” the bank said.

BofA stuck to its cautious stance on the luxury sector, but said the earnings upgrade story at Burberry will help support outperformance relative to sector peers.

Taking the BofA ML house view of GBP/USD of 1.25 and GBP/EUR of 1.21 would imply an additional £25m FX tailwind at EBIT, and an upgrade of around 6% for FY17.

In a note on 24 June, RBC Capital Markets said that within the luxury sector, Burberry would be the real beneficiary from a weakening pound, with around 14% of revenues in GBP.

“A weakening GBP may shift overseas tourist flows to the UK, which would benefit Burberry Group, although we would be mindful of recent changes in Chinese taxes/import duties and border controls,” it said.

At 1435 BST, Burberry shares were up 4.4% to 1,148p.