Morgan Stanley downgrades rating on 'very overvalued' Next shares

Morgan Stanley downgraded its rating on shares of Next on Thursday to ‘underweight’ from ‘equalweight’ arguing that the stock is "very overvalued", currently trading higher than it was a year ago, which it said "makes very little sense" given it’s been hit hard by the Covid-19 pandemic.

MS, which kept its price target at 3,650p, said even in its own upside scenario, Next revenues are likely to fall 18% this year and its profits more than halve. Although its debt will be down, its leverage will be up and it may need the covenant waiver it has agreed with its banks, Morgan Stanley said.

Despite these issues, the shares are now trading higher than they were last year, when there was no pandemic, the economic outlook was broadly stable and Next was on course to make £725m of profits and to return £500m of this to its shareholders.

"We were concerned even before the Covid-19 crisis about the underlying health of the business, and in particular its growing reliance on credit sales," the bank said. "We now see little scope for Next to return cash to shareholders or to grow EBIT margins on an underlying (i.e. Covid-19 disruption aside) basis.

"So we think the EPS growth 'algorithm' that has served Next so well for the last 20 years may now be broken."

At 1415 BST, the shares were down 1.8% at 5,922p.