RBC ups AB Foods, downgrades Sports Direct and Debenhams

RBC Capital Markets upgraded Associated British Foods, but downgraded Debenhams and Sports Direct as it took a look at the European general retail sector.

“The general retail sector has bounced back from a post-Brexit selloff. However, we still see opportunities to buy stocks likely to see upwards earnings revisions.

“We favour higher quality merchants and online retailers and we are more cautious on companies likely to see like-for-like sales and margin pressure in H2 and 2017.”

The bank upped AB Foods to ‘outperform’ from ‘sector perform’ and lifted the price target to 3,400p from 2,800p.

It noted the shares are down 12% year-to-date but said its full-year 2017/18 earnings per share forecasts are 6% higher than at the start of the year.

“We think ABF has a healthy double-digit EPS compound annual growth rate with EPS momentum owing to Primark share gains and recent strength in Sugar and euro prices. Our survey work favours Primark which still offers an attractive international rollout story.”

On the downside, RBC cut Sports Direct to ‘underperform’ from ‘sector perform’ with an unchanged target price of 280p.

It said Sports Direct shares have reacted well to the company's plans to buy back up to 5% of shares.

“However, our FY18 earnings before interest, tax, depreciation and amortisation forecast is still well below consensus (14%) given cost and currency pressures and as we think it will be challenging for SPD to raise prices when consumer disposable incomes are being squeezed.”

The bank also downgraded Debenhams, to ‘sector perform’ from ‘outperform’ with an unchanged target price of 65p.

It said Debenhams remains cash generative and according to its survey work, retains a range advantage over other retailers.

“However, it is relatively geared into a weaker outlook for consumer disposable incomes and also faces a more price competitive mid-market clothing sector.”

RBC said that while the stock’s valuation is undemanding, like-for-like and EPS growth will be challenging given consumer and dollar sourcing headwinds.

At 1000 BST, AB Foods shares were up 2.1% to 3,013p, Sports Direct was down 3% to 295.80p and Debenhams was down 3.3% to 60.70p.