HSBC ups target on Burberry, but downgrades shares

A weaker sterling will add to Burberry’s growth on both the top-line and bottom-line, but the recent rebound in the share price was “unwarranted” HSBC said.

Neither should investors expect anything more than excess cash to be returned and room to cut costs further was limited, analysts Antoine Beige, Erwan Rambourg and Anne-Laure Bismuth said in a research note sent to clients.

Recent weakness in the pound would “mechanically” add 4% to sales and tack on another 10% to the fashion retailer’s earnings before interest and tax, they said.

Remarks from Burberry boss Christopher Bailey that the company was “addressing how to optimise its capital structure” pointed to a willingness to return excess cash flows, equivalent to about £120-£150m per year, or approximately 2.0% of market capitalisation, rather than eating into its net cash position.

HSBC estimated the latter would stand at £673m by the end of the fiscal year 2016, in March.

On the back of all of the above the broker marked up its estimates between 2016 to 2018 by between 2.0% to 10%, but pointed out how currency movements alone had an impact of between 2”-7%, which was “significantly less than the share price movement”.

“We believe the excessive de-rating of the stock has now been corrected.”

Shares in the iconic fashion retailer were trading 18.4 times HSBC analysts’ estimates for earnings per share for calendar year 2017, versus 16.7 times for LVMH and 15.0 for Richemont.

HSBC downgraded its recommendation to ‘hold’ from ‘buy’ but increased its target price from 1,380p to 1,500p.