UBS lifts Home Retail target on interest rates, currency

14th Jul 2014 10:21

UBS has lifted its target price for the shares of Argos and Homebase owner Home Retail from 230p to 240p, keeping its 'buy' stance on the stock despite the recent sell-off.The shares have fallen around 25% since reaching their 52-week peak of 225.2p in late March, despite the company reporting a "good start to the year", according to UBS."Much of the derating seems to have been from the change in interest rate expectations, with the first rate rise now expected by UBS in Q4 2014, from Q2 2015. "While some derating may be justified based on an increased risk to disposable incomes and the historical correlation, the flip side of higher rates is stronger sterling, which should drive stronger gross margins into 2015-16," the bank said.UBS said in many previous rate-tightening cycles, inflation was rising and sterling was falling. "This time the opposite is the case.""In addition to implying that the tightening will be gradual and modest, Home Retail should benefit materially from lower import costs over the next 18 months. The more that sticks to gross margin, the greater the upside to estimates. If more passes through to the consumer, there will be further downward pressure on inflation and thus interest rates."In contrast, if policymakers decide to tighten because of higher wage inflation, then this will be positive for household cash flow which is already benefiting from lower petrol and food prices, UBS said.BC