Morgan Stanley downgrades Debenhams on pension deficit woes

Morgan Stanley downgraded Debenhams to ‘equalweight’ from ‘overweight’ and cut the price target to 70p from 95p on pension deficit concerns.

“When Debenhams reports its prelims next Thursday, we expect the operating results to be routine. We are concerned, however, that these may be overshadowed by the emergence of a material pension deficit,” the bank said.

It pointed to a pension deficit of more than £200m on a scheme that was in surplus this time last year. MS said that in the context of a company whose market capitalisation has fallen to less than £700m, this would be very significant.

“Factoring in a £250m pension deficit into our valuation work reduces our estimate of fair value from circa 95p to circa 70p per share, highlighting how geared Debenhams' equity value has become to even small changes in assumptions.”

MS said that while the new price target still implies 25% upside potential, this is not sufficient to keep the ‘overweight’ stance.

The bank said it prefers overweight-rated Marks & Spencer and B&M, both of which have more potential upside to Morgan Stanley’s base case with far less downside risk.

MS said its rating and price target are heavily dependent on the assumption of £250m deficit.

“Given the lack of visibility on the underlying assets in the pension scheme, this assumption may turn out to be wide of the mark when the company reports next week.”

At 0910 BST, the shares were down 2% to 54.10p.