Citi ups Marks & Spencer to 'buy', notes limited downside

Citigroup upgraded Marks & Spencer to ‘buy’ from ‘neutral’ and lifted the price target to 365p from 325p as it said downside was limited and the UK strategy presents upside.

The bank said that while it remains cautious about the company’s strategy to sustainably reignite sales growth, it has become more confident about delivery on the UK store plan and sees opportunity on central cost savings.

In addition, Citi highlighted encouraging signs around full price clothing sales and said that despite the increased cash costs, the free cash flow yield is 6.5% in FY18E and 11% in FY19E, with a dividend yield of 6%.

“With the stock down around 7% since the strategy update, investor concerns look overdone.

“Our buy rating is predicated on MKS being able to deliver on its strategic elements whilst maintaining its returns within the Food business. But we see limited downside to the shares at this level and upside from potential upgrades of around 25% over the medium term if MKS delivers.”

The bank kept its full-year 2017 pre-tax profit estimate at £608m but lifted its estimate for FY18 by 4% to reflect half the benefit from the International loss elimination.

Citi said the investment case for Marks is not without risks and it sees more value in the likes of Dixons and Pets at Home, both of which it rates at ‘buy’.

At 1130 GMT, M&S shares were up 2.7% to 336p.