UBS reiterates 'buy' on Burberry but cuts target price

UBS left its ‘buy’ rating on Burberry unchanged on Thursday but cut its target price to 1,650p from 1,700p.

“Our ‘buy’ rating on Burberry is based on our view that the share price does not reflect the true value of the retail productivity improvements and cost savings plan laid out at the strategy update on 18 May,” said UBS analyst Helen Brand.

“We see the news flow this week as supportive for the medium term including both the management changes as well as sequentially improving like-for-like.”

Burberry on Monday announced the departure of chief executive Christopher Bailey as it reported a 3% drop in first quarter like-for-like (LFL) sales, which was less than the 5% fall the market had forecast.

The FTSE 100 fashion group said it still expected low single-digit percentage growth in total retail revenue for the full year, but said it expects first-half wholesale revenue to be down by over 10% and full year licensing revenue will be down by about £20m due to cancellation of the Japanese agreement.

Directors continued to expect 2017 adjusted profit before tax will be more weighted to the second half than in the previous year, but it was calculated that there would be a £90m benefit from currency rates if they remain at current levels, up from the circa £50m foreseen at April's rates.

“Our reverse discounted cash flow suggests that the stock is pricing in just low single digit uplift in sales densities to fiscal year 2019 which is below our circa 3% LFL uplift each year,” Brand said.

“Half of this comes from e-commerce and the remainder from retail productivity."

Following the first quarter trading update, UBS has lowered its fiscal year 2017 forecast for profit before tax by 3%, mainly due to Burberry’s £90m foreign exchange benefit guidance missing the bank’s £100m estimate.

Shares fell 0.55% to 1,273p at 1035 BST.