Broker tips: Next, Melrose Industries, Halfords

RBC Capital Markets has upgraded its rating for high street retailer Next from 'sector perform' to 'outperform', saying that the company should beat market current market expectations for revenue.
 

Even after raising its growth guidance for fourth-quarter full-price sales in a trading update on 30 October - from 2.5% year-on-year to 3.0% - RBC said it sees further upside risk as a result of increased UK marketing spending and softer comparatives with last year due to mild weather in December 2023.

In addition to UK consumer concerns and a weaker pound, higher staff costs have dampened Next's stock recently, owing to recent changes to the UK minimum wage and how much employers need to pay for National Insurance.

Meanwhile, strong growth in the online overseas business, which accounts for 15% of total sales, should help to re-rate the stock, the broker added.

Next's shares trade at 13.5x forward earnings, but RBC believes the stock warrants a higher rating due to stronger anticipated top-line growth than its historical average of 2%.

The broker has placed a 10,800p target price on the stock, which assumes a price-to-earnings ratio of 15x. If the stock were to re-rate to a PE of 17x, the shares should hit 12,200p, it said.

Melrose Industries surged on Tuesday as JPMorgan Cazenove hiked its price target on the shares to 850p from 650p and placed them on "positive catalyst watch" ahead of full-year results in March.

JPM said its analysis points to the Aero Engine industry being highly attractive for investors but noted it was also "a challenging industry to understand", with many different business models, quite complex accounting, and high investment required to generate attractive long-term returns.

"We think that Melrose is significantly undervalued," JPM said. "We place Melrose on positive catalyst watch ahead of its FY24 results on March 6th 2025, when it plans to provide new medium-term guidance."

JPM said it sees 2025-30 as "something of a golden age" as AE companies benefit from aftermarket profits on the new generation engines they developed and sold over the last 15 years or so.

The bank also said it expects free cash flow to meaningfully improve in 2026-30 and forecasts that Melrose's 2025-30 free cash flow will be £153m/£261m/£392m/£464m/£531m/£595m.

In addition, JPM said that more buybacks are possible. It noted that Melrose completed a £500m share buyback from October 2023 to September 2024 and is undertaking another £250m buyback from October 2024 to March 2026.

JPM maintained its 'overweight' rating on the stock.

Analysts at Canaccord Genuity lowered their target price on automotive retailer Halfords from 146.0p to 127.0p on Tuesday, citing increased net interest costs.

Canaccord Genuity stated Halfords' H125 results showed that "good margin and cost management" had helped to offset a fall in revenues, with adjusted pre-tax profits broadly flat at £21.0m.

As flagged at the time of its pre-close update, Halfords said good strategic progress was being made with its "Fusion" concept, with expansion accelerating on the back of positive results seen over the summer, along with a growing Motoring Club membership base of more than 4.0m.

"Whilst the Group remains comfortable with FY25 consensus and we leave our FY25 forecasts unchanged, we have reduced our outer year forecasts to reflect a slightly more cautious near-term outlook along with circa £14.0m of additional direct labour costs as a result of the recent UK budget," said Canaccord.

The Canadian bank also said Halfords trades on a price-to-earnings of 14.2x, with a dividend yield of 4.2%.

"Our TP is based on a CY25E target multiple of c.12x, broadly in line with the 10-year historical average. We maintain our 'hold' recommendation and continue to want to see evidence that earnings have stabilised before taking a more positive stance," added Canaccord.