Numis initiates coverage of Pets at Home at 'add'

20th Dec 2016 14:43

(ShareCast News) - Numis has initiated coverage of Pets at Home with an 'add' rating and target price of 256p, saying the company is a "market leader with a strong track record"."Despite the meaningful near-term challenges facing the business, we believe the scale, quality and visibility of the long term growth opportunity, led by the capital-light roll-out and maturity of its Services division, should support a material premium to the General Retailers," Numis said.The broker added that Pets at Home has grown to become the largest specialist retailer of pet food, pet products and pet-related services in the UK. The quality of its overall customer proposition has supported "solid and consistent growth" along with ongoing market share gains and a "robust" financial history, Numis said.However, the cost inflationary pressures of the National Living Wage and foreign exchange headwinds are weighing on near-term earnings.First half pre-tax profit grew 3.9% but would have been 8% if excluding the effects of the increase in minimum wage requirements and a weaker pound."Indeed, we see the longer-term structural growth drivers underpinning the Pets at Home equity story - new space, maturity, Services growth, and underlying operational leverage - as very much intact," Numis said.Numis believes the rollout and maturity of the Services operations as well as the opening of more stores could add an incremental £95m of earnings before interest and tax at group level, almost doubling its current pre-tax profit.The target price represents a 44% premium to the general retail sector and underpins the 'add' recommendation, which Numis said it is "happy to support despite the significant near-term challenges facing the business (slower current trading, tougher consumer outlook, online competition, foreign exchange, national living wage), given the high quality longer-term opportunity".Shares fell 0.39% to 232.30p at 1524 GMT.