Broker snap: Smaller premium merited for Mothercare

25th Nov 2010 11:01

While Mothercare has many strengths, including its international exposure, finnCap believes that its current premium to sector peers is too wide and remains a seller.Based on projected calendar 2010 and 2011 earnings, the mother and baby retailer trades at a 2-point and 2.5-point price earnings ratio premium, respectively, when compared with the broker's retail sector coverage universe."However, its 3-year compound annual growth rate in earnings per share ranks below the median for that coverage," says analyst David Stoddart.While Mothercare looks far more attractive in yield terms - with its calendar 2011 dividend yield of 3.8% beating the sector's 3.5% - and its international growth model has scope for further expansion, "its earnings growth, return on capital and lease-adjusted leverage are not especially attractive," claims Stoddart.However, despite the group ending the first half with a net debt of around £8m, resulting from seasonal factors and acquisitions, the broker expects it to return to net cash by year end."While we believe that the international exposure merits a premium rating against the sector, we believe the current premium is too wide," Stoddart concludes.The target price has been bumped from 440p to 470p.