Poundland slumps to new low after HSBC downgrade

HSBC downgraded Poundland to 'hold' from 'buy' and slashed its target price to 160p from 290p after disappointingly slow growth in core trading with no recovery expected until the second half of 2017.

In a trading update on Thursday the discount retailer said it was on track to meet full year profit expectations despite a difficult second half where like-for-like sales fell 4.9%.

The FTSE 250 company said it has been a tough quarter for its core business, which was impacted by difficult market conditions and disruption from the accelerated pace of delivery of the 99p Stores' conversion programme after their acquisition in September.

With the quarterly sales short of its forecasts, HSBC cut its forecasts for underlying profit before tax by 8-15% for the current year and the subsequent two, given 5-6% lower sales and operational gearing impacts.

The bank was reassured by management's continued confidence that the company will generate “at least £25m incremental EBITDA” from 99p Stores.

However, HSBC said the weak core trading was a concern.

"In our view, the distraction of integrating 99p Stores is a legitimate reason for lost focus on the core. However, the extent and duration of this is a surprise and momentum appears to have deteriorated, with no improvement in 4Q despite materially easier comparatives and little prospect of near-term relief."

Planned store openings have also been curtailed to 30-40 for the new financial year, with management anticipating a return towards the historical run rate of 60 once the 99p integration is complete.

HSBC's analysts were also concerned that the investment to stabilise 99p Stores has proved a major drag on cash flow, sending the business to a net debt position.

"While some of this is working capital driven and should reverse, the business has historically strived to maintain a net cash position. Moving into net debt, given the lack of core momentum and operational gearing, is a step up in the risk profile."