Next forecasts lopped again after crazy April weather

Also featured: ITV, Clinigen, Breedon Aggregates

Next has lowered the midpoint of its profit before tax guidance by 2.5%
Much colder weather in March and April reduced demand for clothing

Cantor Fitzgerald has caught up with events and slashed its price target for retailer Next plc (LON:NXT) after this morning's trading update.

The first quarter trading update was somehow both below market expectations but “probably not as bad as feared”, according to Cantor Fitzgerald.

The first part of the above apparently contradictory statement explains why the broker has cut its fiscal 2017 (FY17) pre-tax profit forecast from its top of the analysts' range figure of £870mln to £830mln, while the fact Next's shares were up 4.2% to 5,187p in mid-morning trading explains the second part of the statement.

Cantor's new price target of 5,400p is down from its previous target of 7,200p. It sticks with its 'hold' recommendation.

In Cantor's view, the stock has been pummelled this year by stock rotation, from Next to the likes of M&S, and a reduction of 5-10% in consensus forecasts for fiscal 2017 (FY17), but the company is not “broken”, although it is now entering a period of more moderate growth..

The company has a strong record of increasing earnings per share (EPS) by around 16 a year over the last five years and it generates significantly more free cash flow tan peers such as Marks & Spencer plc (LON:MKS), but growth at its Directory arm is slowing, and recent initiatives, including the UK Label and overseas development will not make up for the shortfall, while the online environment is getting tougher, Cantor noted.

Peel Hunt is a seller, and is sceptical of the management commentary that accompanied the update, although it did cut Next some slack over the “frankly ridiculous weather” in April.

“Next forecasts will fall today (we go from £840mln to £800mln, and we don’t see a change in momentum in the shares either, even if they do trade at a discount to the sector. Until the EPS stabilises, it is worth switching out of Next, into, amongst others, its chief peer M&S, where recovery is beginning,” Peel Hunt said.

The broker has cut its target price to 4,800p from 5,00p.

Deutsche Bank is cutting its advertising estimates again for ITV plc (LON:ITV) having identified three disturbing factors to the free-to-air broadcaster, none of which are going away.

“Our checks point to 3 reasons for the deterioration; (1) the introduction of the UK National Living Wage from 1 April; (2) accelerating decline in the number of adverts being viewed as the shift to on-demand/online and mobile viewing accelerates; (3) advertisers being more aggressive on pricing for TV airtime,” the German bank said.

ITV is more at risk than US broadcasters, which have, in any case, adjusted to the changing landscape. The UK is seeing the most rapid shifts in viewing habits, endangering the 75% of earnings that come from linear, i.e. scheduled between broadcast programmes, ads.

On the small caps front, RBC Capital Markets has upped its price target for Clinigen Group PLC (LON:CLIBN), the speciality pharma group, saying fears that it would not meet consensus estimates were “overdone”, while admitting that confusion still exists on how the business works and fits together.

“Clinigen provides Pharma companies with comparator drugs for clinical trials, a market with a good growth outlook and where specialist services are blocking out competition. This provides market insight (and product pipelines) which Clinigen then utilises to become an ethical supplier of drugs to patients in need, crossing geographical borders and regulatory hurdles,” RBC explained.

“This enhances its standing with the Pharma Cos again, providing it with a further opportunity to act as the commercial partner or even with acquisition candidates to build out its own products business,” the broker added.

Increasing its price target to 800p from 750p – the shares currently trade just above five quid – the broker encouraged its clients to take advantage of the deep discount in the group's valuation ahead of its results in September.

“Clinigen provides growth that is uncorrelated to the market, defensive in nature and, whilst some divisions are lumpy in nature, this risk will dissipate as size and diversity increases,” RBC said.

Another small cap seeing its price target hoisted is Breedon Aggregates Ltd (LON:BREE), where Cantor Fitzgerald has lifted the target by 5p to 80p ahead of the verdict from the authorities on its acquisition of Hope Construction Materials.

It sees further significant upside to its target price over the medium-term predicated on the company making further shrewdly-judged acquisitions.


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