Berenberg has upgraded its rating for DFS Furniture PLC (LON:DFS) to ‘buy’ from ‘hold’ in a review of European general retailer after raising its target price for the sofa stores firm.
The German bank hiked its target price for the FTSE SmallCap to 280p from 230p, with the stock trading at 229.50p currently, down 1.1%.
READ: DFS Furniture sees strong growth in underlying sales after latent demand, leaves full-year profit expectations unchanged
The Berenberg analysts pointed out that DFS’s like-for-like sales turned positive across all brands in the first half of the current year and think its profit forecasts are underpinned by M&A synergies.
They added: “While leverage is high post-acquisition, its cash conversion is among the highest cash-generative businesses in the sector.”
Commenting overall on general retailers, the analysts said that while they expect EBIT margin erosion to continue for most retailers, there is a lack of comparability across the sector, while variations in cash conversion and capital intensity reduce its relevance.
They concluded: “In light of these variations, we switch to cash-based valuation metrics.”
The Berenberg analysts also raised their target price for JD Sports Fashion PLC (LON:JD.) to 570p from 530p and repeated a ‘buy’ rating on the retailer, tagging it as their top pick in the sector.
The analysts said; “While it faces some margin pressure from geographical mix, its earnings growth and cash conversion are both above-average and ROIC is best-in-class.
“Its recent US acquisition, Finish Line, is already showing signs of improvement,” they added.
Shares in JD Sports were 0.9% higher at 452.60p.