Broker tips: Burberry, International Distribution Services, MJ Gleeson

Analysts at RBC Capital Markets raised their target price on fashion brand Burberry from 1,800.0p to 2,070.0p on Friday, citing the group’s “sensible strategy”.

RBC Capital said it viewed Burberry’s revised strategy as “sensible” with key focus areas broadly in line with its expectations. Targets were also said to not be “hugely surprising”.

“We have more belief in £4.0bn revenue target, and are less confident on EBIT margins significantly above 20%, particularly in the absence of any meaningful gross margin support,” said RBC.

The Canadian bank, which reiterated its ‘sector perform’ rating on the stock, noted that it would prefer to wait and see the reaction of Daniel Lee’s initial contribution in early 2023 and also profit and loss evolution, with a view to re-evaluating its thesis in the upcoming quarters.

“Burberry trades at 17x CY23E P/E, 10x EV/EBIT and 2.0x EV/ sales (vs sector ex Hermes on 20x, 12x and 3.1x). The stock offers valuation support, and with benefit of new leadership, creative director and strategy, we think the business could re-rate if successfully executed.”

Analysts at Berenberg lowered their target price on postal service operator International Distributions Services from 480.0p to 370.0p on Friday but said the company’s recent first-half results offered “limited” comfort to shareholders.

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Berenberg said International Distributions Services’ interim results, which follows a string of profit warnings and negative headlines, may come as “some relief” to investors as they included no further cuts to guidance.

However, the German bank said that given there was no sign of a resolution between IDS and worker’s unions in the UK and that the macro outlook remains “gloomy”, the situation for the company formerly known as Royal Mail continues to be “challenging”.

“The shares are now in deep-value territory in our view, but a deal with the unions is probably needed for the shares to perform,” said the analysts, who stood by their ‘buy’ rating on the stock.

“Due to earnings uncertainty and volatility, traditional earnings multiples are now of limited use for IDS, in our view. However, despite the negative earnings momentum, the shares seem to have found a floor at around 200.0p, possibly reflecting the backstop valuation of the GLS asset. Given the deteriorating macro environment in Europe, we reduce our estimate of GLS’s current fair value to 330.0p.”

Liberum cut its price target on MJ Gleeson on Friday to 560.0p from 700.0p following an update in which the builder said it had seen a surge in cancellations after demand slumped in the wake of September’s mini-budget.

Liberum, which is Gleeson’s house broker, noted that after a six-week period of slow sales, management now expects Homes’ 2023 volumes to fall to 1,600-2,000, down up to 25% on 2022.

The broker cut its FY23 earnings per share estimate by 30% on lower Homes and Land profits and reduced its forecast for unit completions in 2023 to 1,750 from 2,000.

“Homes is seeing trends observed elsewhere, but completions are more impacted as it deliberately carried a lower order book into the year,” said Liberum, which has a ‘buy’ rating on the stock.

“We are encouraged that Gleeson is attracting new buyers to its better value proposition, pricing remains robust, and we see mortgage rates falling in 2023 and the outlook clearing,” it said. “We still see over 50% total shareholder return to our sum or the parts-based valuation. Investors should not forget Homes’ excellent growth track record and prospects on rising site numbers.”