RBC Capital adjusts ratings on general retail stocks

RBC Capital Markets downgraded Marks & Spencer to ‘outperform’ from ‘top pick’ and Associated British Foods to ‘underperform’ from ‘sector perform’ but lifted Dixons Carphone to ‘top pick’ from outperform, as it took a look at the general retail sector.

As far as Dixons is concerned, the Canadian bank said it expects further market share gains, positive news flow on its higher-rated Connected World Services business and a potential property restructuring programme.

In addition, it pointed to further margin progression and a stronger TV upgrade cycle in 2016.

“As the only large-scale electricals and mobile retailer in the UK and Northern Europe, we believe Dixons Carphone's growth prospects are strong.

“With a favourable technology cycle and the growing demand for connected devices, Dixons Carphone is able to offer an unrivalled offering to its customers.”

RBC sees upside to management's target of £80m of synergies as Dixons Carphone benefits from an integrated mobile retail offering and consolidates its cost base.

In the longer term, it sees significant earnings potential from Connected World Services as Dixons Carphone leverages its unique expertise in the mobile and connectivity space to offer services to third parties.

The bank remains positive on Marks & Spencer shares but said it was mindful of soft clothing like-for-like sales and subdued international demand in the near term.

It said M&S' online execution has been stronger this year and strong buying gains should extend into next year, while the company’s food offer should continue to outperform.

In addition, the valuation is undemanding, with strong cash generation providing scope for multi-year cash returns, RBC said.

The bank cut Marks & Spencer’s target price to 600p from 700p and kept Dixons Carphone’s at 550p.

RBC took an axe to Associated British Foods, cutting its rating and slashing its target price to 3,000 from 3,700p on concerns about Primark.

It said the valuation is relatively full given a lack of earnings per share momentum and as it expects Primark's LFL growth to remain moderate.

“ABF has a strong management team but it faces cost and currency headwinds and we think Primark's longer term profit pool may be constrained by a lack of online exposure.”

At 1000 GMT, M&S shares were up 0.5% to 453.60p, Dixons Carphone was 0.7% higher at 480.3p and AB Foods was 1.2% weaker at 3,286p.