Broker tips: Boohoo, U&I

The bank said the profit beat and reiteration of mid-term guidance was a reassuring message following share price underperformance. However, the FY19 adjusted EBITDA margin guidance is less compelling after subtracting dual running costs related to the PrettyLittleThing warehouse relocation that are being recognised as "exceptional".

RBC kept is 'underperform' rating on the stock as it said the margin outlook remains unchanged.

The bank said Boohoo's valuation reflects expectations of continued superior levels of growth that it doesn't see happening without additional margin investment, as industry peers have shown.

"We believe Boohoo needs to invest further in establishing defendable competitive moats. We, therefore, anticipate a margin re-set driven by price investments, rising customer acquisition costs and enhancements to enhance the proposition, particularly around delivery, where Boohoo is less competitive than its peers."

Boohoo shares surged on Wednesday after it said full-year sales nearly doubled and pre-tax profit rose 40% while hailing an "exceptional" performance from PrettyLittleThing and a strong start to the current financial year.

In the year ended 28 February 2018, revenue increased 97% to £579.8m, while pre-tax profit came in at £43.3m versus £30.9m the year before. Adjusted earnings before interest, tax depreciation and amortisation were up 61% to £56.9m and net cash at year end stood at £133m versus £58.4m in 2017.

Revenue at Boohoo was up 32% to £374.1m, while Nasty Gal's revenues were £24.4m since the start-up in 2017, but it was PrettyLittleThing that stood out, with revenue up a whopping 228% to £181.3m and customer numbers 128% higher than the previous year.

Record development and trading gains achieved in U&I's last trading year demonstrated that the firm was capable of delivering on its potential, setting the scene for a "continuation of good gains" in future years, according to a note from Liberum.

Initiating coverage on U&I with a 'buy' rating, Liberum's analysts highlighted significant long-term share price upside as current schemes progressed and new ones were added while its investment portfolio was repositioned and its valuation discount continues to narrow.

Liberum saw a 50% upside to the specialist regeneration developer and investor's net asset value from developments, of which the majority will be returned to shareholders, as the combination of visible attractive returns and an "unjustified valuation discount" enhanced U&I's share price upside.

U&I has exposure to a £7bn gross development value pipeline of schemes which, relative to its £380m NAV, was seen as underpinning significant future return prospects.

While Liberum noted that development activity was "inherently higher-risk" and value creation "lumpy", gains at U&I had averaged £45m per year since 2013, something the group looks to increase to £50m this year and £125m-£150m over the next three years from its existing projects.

"The scale of the existing pipeline ensures that U&I does not need to chase volume and can be selective in future bidding," Liberum's analysts said.

"We believe there is significant inherent value in U&I's large development pipeline and the group has demonstrated its ability to deliver with 12% total returns in FY18," the note read.

In a period of "more mature" real estate returns, Liberum expects developers, such as U&I, to outperform.

The broker issued U&I, currently trading at 202.50p, with a target price of 280p.