Home Retail takeover rumours highlight potential, say RBC and Investec

RBC Capital Markets and Investec said fresh rumours of a £1bn takeover bid for Home Retail Group were credible but also highlighted that the shares are undervalued and could recover under current management.

Home Retail, the owner of the Argos and Homebase retail chains, is "being circled by potential buyers" after its recent profit warning, according to reports on Sunday.

According to an unsubstantiated article in the Sunday Times, various industry experts have been called on to advise on potential private equity approaches, with Home Retail's board said to be on the alert for an offer.

The investment banks said such reports were not surprising given the recent weakness in the shares and valuation support that lies within the group, notably its net cash position of close to £200m and fully-funded net loan book that will top £600m by year end.

Therefore, with a market value of £900m, the core Argos business is effectively being valued at just 1-2 times trailing EBIT of £129m, said RBC, or that HOME shares effectively trade on -0.7x adjusted EV/EBIT, said Investec.

Investec said that the reports appeared vague and that any potential bidders will likely wait until after the peak Christmas trading update.

"Bid discussions tend to come and go, however we think the company's depressed valuation and potential for an alternative strategy means that the press reports cannot be dismissed out of hand," RBC said, which has a 150p price target and 'outperform' rating.

The stumbling block for any would-be bidder, RBC suggested, is likely to be Home Retail's £333m rental liabilities, which means it is "not under-leveraged", though the Argos store estate is more flexible these days.

Homebase is marginally profitable and any buyer would be confident of cutting annual capital expenditure of £175m and managing down its relatively high tax rate over time.

Investec said it continued to see Home Retail as a value play in its own right and has a 155p target price and 'buy'rating on the shares.

"Significant strides have been made to restructure Homebase and Argos’s business model is capable of delivering operational leverage through an efficient multi-channel model. However, market sentiment - and external interest - is likely to wait until proof of delivery through peak at Argos for confidence in its plans to build."