UBS downgrades Card Factory after strong run

UBS downgraded Card Factory to 'neutral' from 'buy' following a strong run in the share price after better-than-expected Christmas trading.

"We see limited upside risks to earnings other than a like-for-like sales recovery; although at the end of March current trading in Q1 was robust. We think the valuation support for this stock is largely from the dividend yield but with flat EBITDA there is only limited leverage beyond the free cash flow yield.

"With the stock currently trading on 5.7% calendar 2017 FCF yield and the market assuming this is all returned as a dividend we see limited further upside."

The bank reckons FX is the biggest challenge in the short term, noting that since its last update, the spot GBP/USD price has recovered to $1.29 from $1.25. Given hedging, there will be little benefit for FY18 which has a hedged rate of $1.36 compared to $1.64 for FY17, it said.

"We now assume the FY19 gross margin impact can be fully mitigated and assume flat gross margin from -50bps previously."

Still, UBS said the company's business model remains resilient and Card Factory's "leading" value proposition on quality and price should continue to deliver market share gains. It also thinks the group will benefit from an industry consolidation.

UBS bumped up its price target on the stock to 320p from 295p.

At 1310 BST, the shares were down 1.8% to 319.70p.