Broker tips: BT, B&M, M&S

Citi upgraded BT Group to 'buy' from 'neutral' on Monday as it argued that pricing momentum could offset free cash flow headwinds.

"BT is facing headwinds to FCF generation that come from record levels of FttP (fibre-to-the-premises) investments (that will largely remain in place for the next three years), rising taxes and interest costs, as well as labour and energy," it said.

"These headwinds would normally render any telco unattractive and hence why the stock has been so weak in 2H22, reflecting these challenges."

However, Citi also noted that "BT has some things that could move in its favour", as wholesale pricing moves higher, retail prices could see a significant move not just on the back book but on the front book ISP margins get squeezed.

Analysts at Berenberg raised their target price on discount retailer B&M from 460.0p to 525.0p on Monday, stating the group was "well set for 2023".

Berenberg stated B&M's third quarter revenue performance was "well ahead of expectations", which it believes provides "useful evidence" that its discount business model was "well placed" to navigate the prevailing consumer backdrop.

"With struggling peers providing an opportunity for further market share gains, a well-controlled inventory position and the potential for surplus capital returns to continue over the medium term," said Berenberg, which also reiterated its 'buy' recommendation on the stock.

The German bank said challenges facing the UK retail sector were already "well publicised". However, it thinks B&M is "relatively well placed" to navigate the prevailing environment and said its "leading price position" should help it benefit from consumers choosing to trade down as a result of disposable income pressures, while the struggles of peers such as Wilkos also create the potential for additional market share gains.

"Furthermore, while various players in the broader retail sector are facing challenges from excess inventory, B&M ended Q3 with its inventory down £100.0m year-on0year, which should be supportive for margins in the coming periods," concluded Berenberg.

Analysts at Jeffries raised their target price on retailer Marks & Spencer from 115.0p to 125.0p on Monday after market share data confirmed a "strong Q3" for the group.

Jefferies stated recent numbers revealed that Marks & Spencer had delivered a solid third-quarter performance in both its food and GM units.

The broker said next week's trading update from M&S could very well nudge up its full-year expectations, especially if "visibly resilient progress" in food has come with "a more acceptable" gross margin cost than that seen in the first half of 2022.

"Early days but M&S is starting to show encouraging staying power against a volatile backdrop," said Jefferies, which reiterated its 'hold' rating on the stock.

However, Jefferies did note that historically, M&S had proven itself to be "poorly equipped" to deliver in a tougher UK macro environment, and said its estimates for H2 and the next trading year had drawn "some inspiration" from that parallel.

It also added that M&S was the most financially leveraged out of its "universe of seven UK groups", but, in an absolute context, highlighted that it was not to the extent that it believes the firm's balance sheet may become a concern.