Exane ups Home Retail, downgrades Marks & Spencer

Exane BNP Paribas took a look at general retailers, upping its stance on Home Retail but cutting its rating on Marks & Spencer.

The bank lifted Home Retail to ‘neutral’ from ‘underperform’, bring the price target up to 150 from 80p, given the likelihood of a bid from Sainsbury’s, but with a lack of visibility over the price.

“A struggling and structurally pressured core business looks to have found a potential suitor. These opportunities won’t come along often, Sainsbury’s management sound enthused, and our central case is that a deal completes,” it said.

It said the sale of Homebase makes strategic sense, adding that while the business appeared to be stabilised, it was a distraction neither Home Retail nor Sainsbury needed.

In addition, Exane reckons the sale price of £340m, or £265m excluding costs, is reasonable, but said the £20m dent in the group’s ongoing profitability means the business hasn’t been much more than given away.

This leaves investors and analysts pondering over the value of Argos, said the bank.

It pointed out that following the disposal, Home Retail has a cash pile of around £350m and a pension liability of about £150m.

It estimates the merger could generate around £100-150m of synergies, but said Sainsbury's won’t want to pay a multiple that implies all are delivered.

"With 185p being the upper end of what Sainsburys may pay, we take a 20% cut to this to reflect the associated risk. Given the proximity of the share, we derive a 'neutral' rating."

The bank downgraded Marks & Spencer to ‘neutral’ from ‘outperform’ and cut the price target to 465p from 580p.

Exane said the revolution of the M&S supply chain, logistics and technology has driven two yeas of P&L stabilisation, with margins improved and market share sacrificed.

It said that while there is more margin to go for, gains are likely to slow, and this part of the investment case now looks better understood.

“That leaves M&S more reliant on revenue momentum, and with structural trends accelerating, and real estate flexibility still limited, we (admittedly 6 months too late) move to the sidelines to await news of the next phase under new management.”

Exane said the opportune time to move to the sidelines would have been six months ago, before revenue declines persisted against soft comparatives.

At 0926 GMT, Home Retail shares were up 4.3% to 143.10p while M&S was up 0.7% to 420.40p.