Burberry risk/reward now more balanced, says Goldman

Goldman Sachs upgraded its stance on luxury brand Burberry to ‘neutral’ from ‘sell’ and lifted the price target to 1,690p from 1,595p as it said the risk/reward is now more balanced.

The bank noted that since being added to its sell list in June last year, the shares are down 1.6% in absolute terms, compared with the broader European market up 7.3% and the luxury sector up 16%.

"Overall, we see Burberry navigating the adverse impacts of the pandemic well, particularly measured by the resilience in gross margin. In context, we raise our gross margin forecasts, which helps drive our higher EBIT forecasts (+7% per annum FY21-23E)," it said.

"We remain cautious on the medium-term margin trajectory at Burberry, given the risks we see of higher investment to support brand momentum as the sales environment normalises. However, we see strength in luxury consumption within mainland China, coupled with higher full-price sales mix, which should provide additional flexibility for investment in opex."

GS said Burberry trades on a CY2022E price-to-earnings of 25.1x and EV/EBIT of 15.4x, which is not expensive in the context of luxury peers and provides a more balanced risk/reward.