Broker tips: LSE Group, Next

The German bank believes the LSE will benefit greatly from increased levels of clearing derivatives and a greater use of quantitative investment techniques and expects the exposure will help the exchange deliver "a rapidly growing, but fairly stable, earnings stream" over the next three years.

"Investors should not be put off by the superficial complexity of LSE," said Berenberg in its Monday morning research note entitled, The 10-step guide to buying LSE.

"The group’s business model is straightforward and we believe the answers to just 10 questions can make investors comfortable with buying LSE."

Berenberg, which cut its target price on the LSE from 5,380p to 5,260p, noted that the marginal cost of clearing a trade or selling an additional index licence on the exchange was "close to zero", making operational leverage an intrinsic feature of the outfit's business model.

"We expect LSE to grow earnings by 16% next year; the average for global exchanges is only 8%, yet LSE continues to be valued in line with the sector average on c18.2x P/E (2020)."

"We find this hard to reconcile with LSE’s exposure to secular growth trends and superior earnings visibility. We believe LSE offers attractive growth at a reasonable price.”

Berenberg also noted that it feels risks from Brexit and euro-clearing had been "overstated".

Next was under the cosh on Monday after Credit Suisse cut the stock to 'underperform' from 'neutral' and slashed the price target to 4,800p from 5,800p following the company's trading statement earlier this month.

It said that while the fourth quarter showed how well managed Next is and the resilience of the brand, it sees no end to the gradual margin attrition, which is likely to accelerate in future years as FX turns negative, eventually impacting cash generation.

"While the shares trade in line with UK peers on 11x 12-month forward price-to-earnings, with four-year earnings per share growth of 2.3% per annum we see little upside, given concerns over UK consumption and much better value elsewhere in the sector in categories and stocks with structural growth, i.e. online (Asos/Zalando), discount (B&M/Primark) and sporting goods (Adidas/JD Sport)."

Credit Suisse said 2018/19 will see the third consecutive year of sales decline and margin decline for Next Brand in the UK. It expects margin declines of around 100 basis points a year, driven by the store estate, which could now accelerate as marginal stores lose footfall from peer closure, resulting in accelerated downsizing and margin pressure from the de-leverage channel shift.

The bank reckoned that Next's £300m per year buyback will start to be cut in 20/21, threatening the 4.2% per annum contribution to EPS.