Liberum downgrades Boohoo on valuation but still bullish

In a note on clothing retailers, Liberum said it remains bullish on Boohoo’s prospects, but on a price-to-earnings ratio of 72x February 2017 after a surge in the share price, the stock should pause for breath.

The brokerage said Boohoo offers a significant early stage growth opportunity. “Capex of more than £100m over the next five years will lay a platform to grow sales to over £1bn versus £195m in FY16 and this will all be funded from internally generated cash. It sells only its own brand, which supports high margins.”

Liberum has a 120p price target on the stock.

The brokerage said its top picks in the sector were Zara owner Inditex, Ted Baker, ASOS and Joules, all of which it rates at ‘buy’.

It said Inditex has a business model that is evolving rapidly to take advantage of online opportunities alongside space expansion opening new markets with a lower capex requirement.

As far as Ted Baker is concerned, Liberum said the company consistently achieved high sales growth off what remains a relatively small store base.

“Ted is trading at a 12% discount to its long term average PE and 10% below recent highs. We view this as an attractive entry point,” it said.

Liberum pointed out that online retailer ASOS shrugged off the retail fears dogging the rest of the UK high street with “excellent” full-year results which showed pre-tax profit grew 37% on the back of 26% sales growth.

Finally, it said Joules provides double-digit compound earnings growth from a disciplined store roll-out, an accretive online channel and nascent international opportunities.

“Joules has strong brand credentials, is growing from a smaller base than peers and is taking share in the fastest growing segment of the UK clothing market.”

At 0940 GMT, Boohoo shares were down 1.8% to 115.75p, Inditex shares were up 0.9% to €31.34, Ted Baker was up 1.3% to 2,533p, and ASOS shares were up 1.5% to 4,914.50p.