Secretive UK broker Redburn lit the touch paper under Next Plc (LON:NXT) shares today as it upgraded its rating all the way to ‘buy’ from ‘sell’ in a detailed 92 page note on the troubled clothing retailer.
In early morning trading, Next shares topped the FTSE 100 leader board, up nearly 3.5%, or 132p at 3,959p.
In a note to clients, entitled ‘Crisis? What Crisis?’, Redburn analysts Geoff Lowery and Emily Want concluded that “the Next Brand is mature rather than malnourished.”
They said: “While it is no longer a vast growth engine, the franchise is not in the grip of an existential crisis in the way the extreme absolute derating of the equity suggests.”
Fundamentally healthy …
The analysts noted that Next has “fewer exciting ways to invest and fewer self-help levers to pull” and is “more sensitive to market dynamics than ever before.”
They added: “This cocktail justifies a derating, but the severity of it means a collapse in returns and cash flow is now implied.
“There will be some pain in 2017, but our analysis says Next is fundamentally healthy. Not only is it defensive, it is also advantaged by its robust brand, business model and flexibility.”
The analysts said: “The next phase will see even more cash generated and returned.”
They pointed out: “Over the three years to January 2020, Next should generate, and return to shareholders, cash flow equivalent to 30% of its current equity value.”
The analysts said: “In the next 12 months, we expect dividends, ordinary plus special, to offer a handsome near-9% yield. We bridge to a one-year total shareholder return of 37%.”