ShrutiAggarwal
Member Since 8 December 2015
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Last Seen: 11 Mar '19
Posted on 10 September 2018, 2:09 PM

Marks and spenser, an avoid at current levels

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

Marks and Spenser is an avoid at the current levels as the valuation also shows that the company is fairly priced at the current level. The stock finished trading on the London stock exchange at 291p on 10th September, down by 0.78% compared to the last close. The stock has been trading below 20 DMA (Day moving average), 50 DMA and 100 DMA of 299p, 305p and 292p respectively. Trading below the short term moving averages generally doesn’t go well with the bulls! In terms of technical analysis or charting also, the stock is forming head and shoulders pattern and in case the stocks goes below 290p, it may see a retest of lows of 260-270. Therefore traders or investors shall avoid initiating any long in the company till we see any signs of consolidation or up move. The immediate support and resistance lies at 288p and 299p respectively. Traders or investors would be advised to keep an eye at the respective levels and accordingly hedge the positions.

As per the company’s FY’18 results, the company reported a flat growth in revenue of 0.7% year on year.  The retail giant’s profit before tax and after adjusting the non-recurring items was down by 5.4% year on year because of the decrease in food gross margin. Nonrecurring items of £514.1m included £321.1m for company’s UK store estate closure programme.  As per the management guidance, cash costs of transformation remain in line with plan. However, the good news for the investors is that the company’s net debt has reduced significantly by £107.2m.

In the words of company’s CEO, “At our half year results in November I outlined the need for accelerated change at M&S. The first phase of our transformation plan, restoring the basics, is now well under way and the actions taken have increased the velocity of change running through our business. These changes come with short term costs which are reflected in today’s results. “There are a number of structural issues to address and we are taking steps towards fixing these. The new organization will largely be in place by July and the team is now tackling transforming our culture to make M&S a faster, lower cost, more commercial, more digital business. This is vital as we start to leverage the strength of the M&S brand and values across a family of businesses to deliver sustainable, profitable growth in three to five years”.

Earnings outlook:

Based on the above discussion, the management guidance and our own estimates, we estimate M & S 2019 revenue will be £11.159 billion (£10.698 billion for fiscal 2018) and the operating profit will be £223 million (2018 operating profit was £157 million).Our estimates are conservative and assume 3% year-over-year growth in sales and a margin for earnings before interest and taxes (EBIT) of 2.0%.

 

Valuation:

From 2014 through 2018, M&S has traded at an average enterprise value by EBITDA multiple of 8.1x. That assumes a multiple of 9.0x to calculate the target price. Based on this ratio and on estimated 2019 EBITDA, the stock price target is 280 pence. 


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