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(Sharecast News) - RBC Capital Markets downgraded Frasers Group on Tuesday to 'underperform' from 'sector perform' as it said the risk/reward was less favourable.
The bank noted that the share price has risen 12% year to date, likely due to improved sentiment on the sector and as the company has taken the opportunity to buy back its shares at depressed levels.
"The shares have now run slightly ahead of our fair value and we see more upside in several other stocks, hence we have moved our rating to underperform," said RBC, which lifted the price target to 750p from 720p.
RBC said the potential acquisition of Hugo Boss is slightly accretive, but turnaround visibility is low. It estimates that an acquisition at 38 would be accretive, with return on capital employed just above Frasers' cost of capital.
"But the offer price is only a 4% premium so there is a risk Frasers may have to raise its bid as Boss is yet to recommend any offer," the bank said. "FRAS would be more exposed to premium apparel and we estimate financial leverage will increase from 1.3x to approaching 2.0x net debt to EBITDA."
RBC noted that Frasers has followed up with a nil-premium takeover offer for Australia's Accent Group, which its team expects to be rejected.
"In Premium Lifestyle Flannels has provided Frasers with an attractive store rollout story, although this is nearing the end of its expansion phase with over 80 locations across the country," it said.
RBC also pointed out that international sales represent around 30% of group sales for Frasers and said this provides the company with a longer term growth opportunity, for example by returning XXL in the Nordics to profitability and scaling up Holdsport in southern Africa.
"We think this expansion provides an attractive longer term opportunity for growth, albeit we point out Frasers' mixed track record internationally, given the challenges of localisation, and having the right infrastructure to support the business," it said.
At 0925 BST, the shares were down 5% at 715.50p.
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