RBC Capital upgrades Marks & Spencer to 'outperform'

RBC Capital Markets upgraded Marks & Spencer on Monday to ‘outperform’ from ‘sector perform’ and lifted the price target to 300p from 285p.

It noted that the share price has come in 17% from recent highs, due to investor repositioning and concerns over the UK consumer and costs outlook.

"But there has been no great change in its strong fundamentals in our view," RBC said.

RBC said M&S has been making good progress with its food business, helped by an improved value for money perception, while its clothing offer has benefitted from a stronger digital offer, third-party brands and a better bought range, with improvements in style, quality and value perception.

The bank said that despite the retailer’s relative maturity in the UK, it sees potential for it to generate moderate growth and to have a progressive cash returns policy, which should appeal to long-term investors.

"At 10x CY24E price-to-earnings, the shares appear to be pricing no growth, but we think M&S can deliver this with a progressive cash returns policy, thus broadening its appeal to long term investors," it said.

RBC said that if M&S can show that it can generate sustainable profit growth and increase its dividend steadily over time, there is potential for it to rerate to around 12x forward earnings, which would equate to around 300p/share.

"We use the average of a DCF and sum-of-the-parts analyses to arrive at our target price of 300p for M&S, which supports our outperform rating.

"M&S has historically been a UK consumer proxy as it has higher than average exposure to the UK consumer; however, recently it has benefitted from self-help enabling its food and clothing businesses to outperform their markets."

At 0900 GMT, the shares were up 2.3% at 248.32p.