ShrutiAggarwal
Member Since 8 December 2015
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Posted on 2 June 2017, 8:02 AM

Marks and spenser group plc, a hold with a potnetial upside of upto 8%

Topics: Analysis
Other Insights on Related Shares: MKS.L

Marks and Spencer group plc. is a ‘Hold’ at the current level as the stock still has a lot of scope of upside. The stock finished trading on the London Stock exchange at 382.5 p a share on 31st May, down by 1.14% compared to its previous close. The company announced its financial year 2017 results on 24th May. However, post the announcement of the results,  the stock has been seen in a correction mode. However, investors or traders shall wait for the stock to consolidate at its support levels and can even initiate fresh buying from the respective support zone. As per the charting or technical analysis, the medium term or long term trend of the stock looks bullish only as the stock has been firmly trading on the upward trend line and has also been making higher highs and lower lows.  Currently, the retail giant has been trading above its 20 day moving average (DMA), 50 DMA and 100 DMA of 380p, 359p and 347p respectively.  The immediate support for the stock is at 380p and 370p respectively. If the stock would be done with its correction or consolidation around 377p-380p, then investors or traders can initiate fresh buying and could hold the stock for the higher targets. The resistance for the stock is at 395p. Therefore, traders or investors shall keep a close eye at the respectively levels and accordingly initiate fresh positions in the stock.

Now let’s throw light on the financial year 2017 results of the company. The company’s  fiscal 2017 revenue grew  by 0.6% year on year to £10,622.0m versus  £10,555.4m in FY’16. However, the company reported adjusted profit before tax was down by 10.3%, year on year in FY’17. The profit before tax decreased because of the expected decrease in clothing and home sales and increased costs of new space. Revenue from clothing  and home was down by 2.8% due to planned reduction in promotion and clearance sales. However, food revenue grew by 4.2% because of new stores. The good news for the investors is that the net debt reduced by £204m because of strong cash generation.

The chairman of the company, Mr. Robert Swannell commented on the results, “This has been a year of accelerated change at M&S, as Steve set out his plan for a simpler business, focused on customers. We believe these actions will make M&S a stronger, sustainable business. We are maintaining a total dividend per share at 18.7p, the same level as last year, taking into account the strong cash generation of the business”

Outlook for 2017-18:

In Clothing & Home, the company expects a space decline of 1-2%, weighted towards the end of the year. The management expects UK cost growth of c.2.5 to 3.5% as a result of new space, cost inflation and the annualisation of investment in customer service, partly offset by Head Office restructuring efficiencies. Capital expenditure is expected to be c.£400m as the company would  increase the rate of Simply Food store openings.

 

Earnings outlook:

Based on the above discussion, the management guidance and our own estimates, we estimate M & S 2018 revenue will be £10.834 billion (£10.622 billion for fiscal 2017) and the operating profit will be £325 million (2017 operating profit was £253 million).Our estimates are conservative and assume 2% year-over-year growth in sales and a margin for earnings before interest and taxes (EBIT) of 3.0%.Please find below the earnings outlook of fiscal 2018

Valuation:

From 2014 through 2017, M&S has traded at an average enterprise value by EBITDA multiple of 8.0x. That assumes a multiple of 7.7x to calculate the target price. Based on this ratio and on estimated 2018 EBITDA, the stock price target is 408 pence. The calculations are shown in the table below:

We set a ‘Hold’ recommendation on Marks and Spenser group plc with 3 months to 6 months target price of 408p.


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