Liberum downgrades Debenhams on unappealing fundamentals

Debenhams was under the cosh on Wednesday as Liberum downgraded its stance on the department store chain to 'sell' from 'hold' and cut the price target to 40p from 58p as it revisited the investment case following the group's prelims.

"Looking past the low current rating (CY18E PER 8.4x), we focus on the fundamentals, which do not enthuse us," it said. The brokerage argued that ongoing structural challenges, a soft consumer environment, rising costs and increasing capex demands make for a difficult outlook.

Liberum acknowledged management's ambition and the progress made so far with the ‘Debenhams Redesigned’ strategy. However, it highlighted long-term structural challenges which it reckons will demand increasing investment just to maintain - at best - market position.

"Mid-market department stores are being squeezed by more premium players, specialists and online. We acknowledge the progress under the new CEO, but turning 13m sq. ft. into ‘destination’ space is tough. Material closures/right-sizing will take time."

It said that capex guidance of £150m a year for FY18-20 suggests total spend over the next four years will exceed Debenhams’ current equity value.

"Free cash flow will be depressed and we forecast a 15% dividend drop in FY18E, although with a forecast free cash flow cover of 0.3x there could be downside risk to this."

Liberum's earnings per share forecasts currently sit 5% to 8% below consensus over FY18-20, implying a compound annual growth rate of -4.6%.

At 0940 BST, the shares were down 2.4% to 42.70p.