Pets at Home Group plc (LON:PETS) and Halfords Group plc (LON:HFD) are "value traps" to be wary of despite being cheap following share price declines on worries about weak consumer confidence, Liberum has warned.
UK retail shares have suffered on the back of softer consumer spending as household incomes come under pressure from rising inflation, driven by a slump in the pound after Brexit.
The FTSE 350 General Retail index has underperformed the wider market by 35% since January 2016, Liberum said. The index has fallen 20% from January 2016 compared to the wider FTSE indices, which have risen 15% on average.
“UK retail sector share prices were hit hard post the Brexit referendum and, despite an initial bounce, have continued to struggle,” the broker said.
“Sentiment continues to weigh and recent consumer data points have seen some weakening.”
In light of weak consumer data, Liberum said care must be taken to "avoid value traps and companies facing significant structural pressures" such as Pets at Home and Halfords.
Liberum repeats 'sell' rating on Pets at Home and Halfords
The broker repeated a ‘sell’ rating on Pets at Home and a target price of 145p, citing fierce competition in UK pet care from the likes of Zooplus. Since Liberum downgraded the company to ‘sell’ last July, its shares have fallen 30%.
Liberum said the group needs investment into third-party brands, which has added downside risks.
It added that it does not see the 4.5% dividend yield as “paying enough for a recovery story that could take three years to deliver meaningful profit growth”.
Halfords was also given a ‘sell’ rating and a target price of 340p but Liberum said there was “less risk” to its forecasts for the retailer of car parts and bicycles than Pets at Home.
“Top line momentum has shown improvement with a particularly strong Easter period and, at the May preliminary results, management re-iterated that it anticipates fiscal year 2018 pre-tax profit to be in line with consensus expectations of broadly flat.
But the broker said: “A key issue for us is whether the cycling market can grow at management's expected 3-5% p.a. and whether Halfords is able to maintain its share in an increasingly competitive environment (on-line and store-based).”
What is a value trap?
A classic value trap is when everything about a particular stock – low price-to-earnings ratio, good cash flow, high yield etc – looks like it is good value.
Actually though, their cheapness is a reflection of their inferior quality in some way. Essentially, they’re cheap for a reason and they’re hard to make any money out of because they’re not being bought for less than their true worth.
Ted Baker, Dixons Carphone and McColl's emerge as 'attractive value plays'
Despite a slump in UK retail, Liberum said some “attractive value plays” have emerged with Ted Baker plc (LON:TED), Dixons Carphone plc (LON:DC) and McColl's Retail Group plc (LON:MCLS) offering “good entry points for investors willing to look beyond the short-term”.
Ted Baker has been rated a ‘buy’ with a target price of 3,100p by Liberum, which said the fashion retailer delivered a strong trading update against tough comparables. Sales rose 14.2% in the 19 weeks to 10 June.
Liberum also rated Dixons Carphone at ‘buy’ with a target price of 230p, saying it believes the retailer of electrical goods has evolved to become much more resilient through greater market share, an improved multi-channel offering, competitive pricing, higher mobile exposure and lower fixed costs.
“We also believe the market’s fears around foreign exchange have been overdone,” Liberum said. “Where the group has had to raise prices, its broad ranges and price architecture means that consumers will still be able to find products that meet with their desired price points.”
On McColl's, a convenience store and newsagent operator, Liberum repeated a 'buy' rating and target price of 240p. The broker pointed to double-digit free cash flow and dividend yields of at least 5%.
"McColl's continues to consolidate a fragmented UK convenience sector, which is benefiting from a structural switch as shoppers make more frequent, top-up purchases. Management has a proven track record in maximising M&A opportunities and driving shareholder returns."