Debenhams boosted by Investec upgrade to 'hold'

Debenhams got a boost on Thursday as Investec upgraded its stance on the stock to 'hold' from 'sell' following a drop in the share price.

It noted that the shares are down 43% year-to-date and said the risk/reward is now skewed to the upside at these levels, given the potential for corporate activity.

"Having unwound long-held options, Mike Ashley now holds 21% of Debenhams ordinary shares via Mash Holdings. He has a history of buying stakes in companies and holding them. He has also shown an interest in UK department stores, having tried to buy House of Fraser in 2014, according to press reports, and still has an 11% stake."

Nevertheless, the brokerage cut its FY18/FY19 pre-tax profit forecasts by 5% and 3%, respectively, due to a weak retail market backdrop. It said Debenhams is still a challenged business with too inflexible a cost base and too many unanswered questions over execution and strategy, adding that it sees better value elsewhere.

"Wider structural pressures from the online shift means implementation needs to speed up, in our view. Without this, it is difficult to see any profit progression in the next three years."

The brokerage cut its price target on the stock to 34p from 39p, reflecting estimate downgrades and moving its valuation basis to a 30% discount to forward price to earnings since IPO, from 25%.

At 1105 GMT, the shares were up 3.5% to 34.16p.