Liberum Capital has downgraded its stance for McColl’s Retail Group PLC (LON:MCLS) to ‘hold’ from ‘buy’ following the convenience stores firm’s warning that annual profits are unlikely to show any growth this year.
The City broker also chopped its target price for the FTSE SmallCap firm back to 200p from 300p, with the shares currently trading at 185p each, down nearly 12% on Friday’s close, having dropped over 20% previously in the year-to-date.
READ: McColl’s warns about full-year profits as P&H failure eats into margins
In a note to clients, Liberum’s analysts noted: “The H1 P&L is weaker than expected, impacted by multiple supply chain administrations, and harsher weather in Q1.
“Management now guides to broadly flat EBITDA for FY18E (y/e Nov) and we are reducing our EBITDA forecasts by c.-14% across FY18E-20E.”
They said the downgrade comes from a lower like-for-like sales assumption and surprisingly lower gross margin percentages due to additional price investment.
The analysts pointed out that McColl’s outlook statement continues to highlight cost pressures and the need to invest in the customer offer to remain competitive.
They added, however, that on the positive side, the firm’s cash flow is stronger due to lower working capital resulting in lower net debt, and the transition to being a sole supplier for Wm Morrison Supermarkets PLC (LON:MRW) has gone well and is ahead of schedule.
But considering the earnings downgrade and also the unexpected departure of McColl’s chief financial officer, Simon Fuller – who is joining Daily Mirror and Express newspapers group Reach PLC (LON:RCH) – they have still cut their rating to ‘hold’.
They concluded: “We need to see regained positive momentum in the Group’s financial performance to return to a more positive stance.”