Interactive Investor

Three new ‘buy’ tips and some ‘abnormally cheap’ stocks

A City analyst has just upgraded a trio of retail shares, while another is bullish on an entire asset class. Graeme Evans has the details.

9th July 2024 13:26

by Graeme Evans from interactive investor

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Post-election interest in undervalued UK stocks continues to focus on the retail sector after a City bank today upgraded its stance on Currys (LSE:CURY), Moonpig Group Ordinary Shares (LSE:MOON) and B&Q owner Kingfisher (LSE:KGF).

Deutsche Bank has also retained “Buy” ratings on Marks & Spencer Group (LSE:MKS), AO World (LSE:AO.), B&M European Value Retail SA (LSE:BME) and Victorian Plumbing Group (LSE:VIC) amid encouraging signs for UK household budgets.

It adds: “With consumer confidence stepping up during the second quarter, political certainty and inflation under control, we expect UK discretionary spending will better track earnings growth in the next 12-18 months.”

The bank’s “things are only getting better” note comes after counterparts at UBS picked out homebuilding and UK retail stocks for attention in the wake of Friday’s election result.

UBS added that UK small and mid-caps in general appear “abnormally cheap”, noting that valuations have failed to factor in the improved UK economic growth outlook.

In support of the retail sector, UBS said that real wage growth is now rising very sharply based on strong nominal wage growth of 6% against headline inflation of 2%. Utility bills have also fallen around 40% from the previously capped level.

UBS said: “Real wage growth could accelerate even faster under a Labour government (and sterling could be stronger). Both help support what already looks like a compelling story.”

It believes that help from a Labour government for lower income households should benefit discounters such as B&M, while a recovery in housing activity on the back of increased housing supply is supportive to the likes of Kingfisher.

Both FTSE 100-listed stocks have the backing of Deutsche Bank, which today lifted the B&Q and Screwfix owner to a “Buy” rating alongside a new price target of 310p.

The shares were near 200p in October but have since rallied to 262p amid signs of resilience in the UK’s property market and wider economy. Kingfisher generates about 20% of its sales from new home renovation work.

The shares rallied today even though disappointing British Retail Consortium figures for June highlighted the weather’s impact on seasonal areas like DIY and gardening.

The bank has also upgraded its stance on Currys alongside a new price target of 95p.

The support follows a period of significant self-help, when the chain sought to preserve cash, stabilise the balance sheet and protect margins against a backdrop of soft demand.

“From here, we view risk as weighted towards the upside,” the bank said today.

As well as the improved trajectory for consumer confidence, it highlighted the potential of replacement cycles in electronics four years on from the Covid surge in demand.

Deutsche Bank adds that a valuation multiple of 7.5 times forecast 2025 earnings represents an attractive risk-reward. It also notes that a stronger balance sheet and improved free cash flow generation opened the door to a resumption of dividend payments.

The City firm’s other recommendation change involved Moonpig, which it sees as an attractive opportunity for gaining exposure to an increasingly confident consumer.

It said: “There's much to like about the business; a market leader commanding a 16% share underpinned by a value-add proposition that lacks real competitive threat.

“This drops through to earnings margins of about 20% and strong cash conversion of 80%-plus on our estimates.”

On 13 times 2025 earnings, Moonpig trades at a discount to e-commerce peers. The bank has a 220p target price, which compares with 199.6p after an improvement of 5.6p in today’s session.

The report includes no change in stance on Marks & Spencer, which continues to have a 350p target price. The retailer trades on 10 times 2025’s forecast earnings, but the bank believes this will improve towards 12 times through consistency of performance.

The least preferred stocks in the bank’s retail coverage are Primark owner Associated British Foods (LSE:ABF), fast fashion chain Boohoo Group (LSE:BOO) and JD Sports Fashion (LSE:JD.).

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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