ShoreCap downgrades Boohoo on valuation grounds, lack of catalysts

Boohoo shares slumped on Friday after Shore Capital cut its rating on the fast-fashion retailer to ‘hold’ from ‘buy’ on valuation grounds, also citing a lack of catalysts and challenges ahead.

"The recent high level of investment, while needed, has put the business in a less than desirable position," it said.

"Boohoo has gained significant market share over the pandemic but will need to trade further profitability merely to retain its position. With Boohoo shares almost back to the IPO price, could a takeover emerge?"

Shore Capital said that following the company’s full-year results earlier in the week, it is now concerned about the prospect of another year of negative free cash flow in FY23. It also said that significant margin investment is required and cut its estimates for FY23 EBITDA by around 50% to £96.5m. This is 15% below the mid-point of the implied FY23 guidance level of £113m.

The broker said it assumes flat sales in the year, versus guidance of low single-digit growth as the business faces tough comps and the cost-of-living impact in the UK, and remains uncompetitive abroad.

"While traditionally we would have seen Boohoo as a well-positioned offering the value space, we are concerned about the increasing reliance on the wholesale business," ShoreCap said.

At 0820 BST, the shares were down 3.8% at 72.16 p.