Broker tips: Frasers, Trainline, Derwent London, Great Portland Estates

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Sharecast News | 18 Sep, 2023

A deal to sell online retailer Missguided to Chinese fast fashion giant Shein could present more opportunities for owner Frasers Group than just an asset disposal, according to broker Shore Capital.

Shore Capital said that the deal could result in a "strategic partnership" between Shein and Frasers, given Shein's recent investment in SPARC Group, which operates high street name Forever 21.

"As part of its deal with Forever 21, Shein is considering providing customer services like returns at Forever 21’s physical locations. A similar arrangement could be made with Frasers' stores, offering customers more flexibility and thus enhancing customer experience," the broker said.

"Given Frasers' strong retail network in the UK, the company could serve as a distribution hub for Shein, reducing shipping times and costs for the latter’s UK customers.Partnering with Frasers could offer Shein a more mature and possibly more affluent customer base, while Frasers could gain access to Shein's younger demographic."

Meanwhile, Shore Capital suggested that Frasers could stand to benefit by listing stock as a third-party retailer on Shein's platform, which would open up 120 million further users across the globe.

Regarding Frasers' share price, the broker said that a price-to-earnings multiple of just 9.9 on current-year earnings, falling to 8.9 the following year' is too cheap compared to the wider sector, considering its strengthening market position and diversification with its consumer offering.

Shore Capital reiterated its 'buy' recommend for the stock.

Analysts at Canaccord Genuity reiterated their 'buy' recommendation and 271.0p target price on shares of Trainline due to their "depressed" valuation despite the "materially" improving outlook and potential for share buybacks.

In their opinion, high levels of free cash flow generation meant there was scope for up to approximately £500m of buybacks over five years.

That could suffice to boost earnings per share by 29%.

On their estimates, the company's EPS was already set to double between fiscal years 2024 and 2028.

But if all the free cash flow generated were funnelled into buybacks then EPS treble over that same timeframe.

In a research note sent to clients they went on to add that " the majority of the regulatory risk has subsided, with the key risk around commissions removed, while closure of some UK rail ticket offices are a possible tailwind."

"We believe the threat of a Labour Government and any potential nationalisation of UK rail is a red herring, as c.20% of the UK rail network has already been quasi-nationalised, with no impact on Trainline."

Morgan Stanley says the recent rise in oil could be a positive for London-focused office property groups, as it looked into the historic correlations between real estate and commodity prices.

In a research note on Monday, the bank reiterated its 'overweight' recommendation for both Derwent London (2,700p target price) and Great Portland Estates (545p target price).

The bank explained that prime real estate is typically used as a "store of value" for wealth that's been derived from commodities – ie Middle Eastern sovereign wealth funds – so it makes sense that higher oil prices should lead to higher demand for prime real estate. And over the past three months, oil has jumped by around 30% from $70 to $90 a barrel, as global oil inventories continue to decline.

For Derwent London and Great Portland Estates, the bank said their balance sheets are "sufficiently capitalised" while net asset value valuations are close to or at all-time lows.

"We are alive to the fact that broader UK exposure and offices as a sub-sector are out of favour, but at current valuation the risk reward is compelling, in our view. A higher oil price provides - even if only incremental - an improved risk reward by potentially limiting some downside risk, all else equal."

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