UK retailers among biggest gainers on broker upgrades

Retailers were among Wednesday’s biggest gainers, with Next and AB Foods both in demand on broker upgrades.

Next climbed 1.7 per cent to £44.01 on the back of an Investec upgrade to “buy”. Investors have been too preoccupied by Next’s short-term trading and have missed its active estate management, Investec said.

Rather than focus on refurbishments, Next has been opening and closing stores to adapt to the changing market, with the result that more than half of Next’s floor space did not exist a decade ago, said the broker. The well-invested and flexible store estate should translate to a sustainable profit margin even if retail like-for-like sales continue to fall, it argued.

Sector peer AB Foods took on 2.4 per cent to £28.77 after Citi added the Primark owner to its “buy” list.

Primark’s implied valuation has fallen nearly 30 per cent in 18 months, against a cut to 2017 earnings forecasts of 17 per cent largely because of currency headwinds, said Citi. The downgrade cycle seems to be over and, with double-digit earnings growth set to return, Primark will re-establish itself as a resilient retailer with a proven international business and an expansion programme with room to expand, Citi argued.

An oil price rally helped underpin the wider market as the FTSE 100 hit a seven-week high, up 43.03 points, or 0.6 per cent, to 7,385.24.

Hikma Pharmaceuticals lost 1.2 per cent to £19.56 on speculation that the US Food and Drug Administration had requested further tests of its generic version of Advair, GlaxoSmithKline’s top-selling asthma inhaler. Awaiting the FDA’s decision, Express Scripts, the drug scheme benefits manager, reported that an Advair clone “may not reach the market until sometime in 2018”.

Vectura, whose inhaler system is licensed by Hikma, fell 3.3 per cent to 144.9p.

ITV slipped 2.3 per cent to 196.2p after a trading update confirmed advertising markets remained weak, though the broadcaster kept its full-year guidance unchanged.

Pearson fell 1.8 per cent to 721p, with Berenberg repeating “sell” advice. Most of the cost savings announced last week had already been baked into consensus forecasts and the planned sale of its K-12 schoolbook division is likely to be dilutive to group earnings, it said.

“Given the concentration of market share in the educational publishing market, we think it is highly unlikely that Pearson would be able to obtain regulatory approval for a sale of its K-12 business to a rival which might pay a high price in return for synergies,” Berenberg said. “This means any buyer is likely to be a financial investor, with specific return requirements likely to entail a relatively unattractive sale price for Pearson.”

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