Broker tips: Debenhams, Tate & Lyle, Burberry

1st Jul 2010 13:16

Department stores group Debenhams was the best performing FTSE 250 stock on Thursday morning after a trading update but KBC Peel Hunt notes that it continues to trade on what the broker regards as an undeserved discount to the retail sector.Though like for like sales comparisons have softened there were some encouraging signs relating to gross margins. "Management had previously pointed to gross margins to be up 80bps [basis points] for Debenhams core department stores, flat for the group including Magasin. However, with strong markdown management, margins will now be ahead of this. Looking into the new financial year, we suspect moves to anticipate a VAT rise to 20% for autumn/winter, ahead of the actual January rise, will leave further margin 'opportunity' for peak trading," KBC analyst John Stevenson said.The trading statement was in line with the broker's forecasts but KBC has turned more bearish on the retail sector as a whole and consequently has cut its forecasts for next year's profit before tax at Debenhams by 9% "to reflect a tight UK consumer environment."The broker is sticking with its "buy" recommendation and 80p price target. The market seems sweet on Tate & Lyle's decision to offload its sugar refining business, with the shares being one of the few to make headway on Thursday morning.The sale price of the business, £211m, was ahead of the £150m to £175m range Panmure Gordon had been expecting, and gives the company more firepower to progress its strategy of focusing on added-value food ingredients."A very welcome move by Tate at a good price, without leading to any material change to earnings forecast. We think a rerating of Tate is warranted and are raising our price target from 440p to 500p, equating to c.11.7x PE [price/earnings] and 7.2x EV/EBITDA [enterprise value/earnings before interest, tax, depreciation and amortisation] for March 2011E [financial year to end-March 2011]," the broker said.The broker is sticking with its "hold" rating for the stock. Nomura Securities is neutral on the luxury sector but has picked upmarket fashion label Burberry as a 'trading buy' this month.Nomura said Burberry shares have enjoyed "one of the largest re-ratings in the luxury sector in the last year, driven by the biggest price increase in the peer group that has more than compensated for relatively higher earnings revisions."The stock trades at a premium to historic price/earnings multiples but Nomura analyst Allegra Perry thinks this is deserved "because of its significantly higher operating margin potential and scope to continue increasing control over operations, particularly in Japan where we believe the group could unlock significant hidden value."The broker has nudged up its earnings per share (EPS) estimates by around 3% for fiscal 2011 and by 7% for fiscal 2012, reflecting greater confidence on wholesale and gross margins.The price target has been cranked up to 818p from 732p, to take into account a ratcheting up of the expected earnings multiple for the stock from 18 to 18.5.That means the price target is now below the current share price following the stock's recent pull-back, which represents a short term buying opportunity in Perry's view.