Peel Hunt has upgraded its target price for the controversial Sports Direct (LON:SPD) to 380p from 200p, reversing its “sell” rating to a “buy”.
It's a bold call considering the opprobium heaped on the online retailer over its zero hour contracts and other 'Victorian' working practices.
An investor visit to its warehouse in Shirebrook this week also descended into farce when founder Mike Ashley pulled put a wad of fifties in a security search.
Peel Hunt, though, has been convinced of the sporting good retailer’s promise to change its ways following the allegation that have soured investors and suppliers alike.
“Amongst all the panto at the Open Day, we sensed a genuine will to change strategy,” it said.
“The market is pricing in further consensus downgrades but we think our EPS numbers now reflect the nadir. Recovery will take time but we see potential for medium-term margin rebuild and thus reverse our stance.”
“As a rule, we do not like double up/downgrades, but when a company is set to change the way it comes to market quite so dramatically, we can’t help but feel Damascene,” said the broker.
But it was the store’s renewed approach to the market that really encouraged Peel Hunt.
“If Sports Direct can genuinely start to win over its suppliers again (and there are apparently some green shoots of hope), then profit progress can re-emerge.”
It said Sports Direct’s change of approach from a “pile it high, sell it cheap” model was a significant statement for the group to make, given its history.
“We do not believe the market will be too concerned by a dilution of the margin and some downgrades based on preopening costs,” it said.
“Our Sell case never surrounded working practices or corporate governance (though both are obviously crucial), it was more to do with the paucity of quality third-party branded product in stores.”
The broker sees adjusted earnings per share topping 20p for 2017, an upside of 40% on last year.