RBC Capital ups Sports Direct target price on better outlook, lower net debt

RBC Capital Markets upped its price target on Mike Ashley's Sports Direct to 360p from 325p due to a better outlook for FY19 and lower net debt, following the company's results on Thursday.

It said the stock's valuation already discounts a solid earnings recovery, hence it remains underperform.

RBC said full-year revenue was a little soft and inventories were up 30% on the year, reflecting a tougher end to the year and a build of more premium product. Gross margin was weaker than expected, reflecting higher inventory provisions, but costs were lower due to provisioning for onerous leases and litigation and more automated warehousing.

"We think SPD should be able to deliver double-digit EBITDA growth in FY19 due to a good World Cup and as it is now well covered on dollar hedging, at circa $1.36 for FY19 and circa $1.41 for FY20 versus circa 1.30 for FY18.

"However we think valuation already reflects a robust recovery in earnings. We believe SPD should earn mid to high twenties earnings per share over the next two years which puts it on a CY19E price-to-earnings of close to 15x, ahead of the sector average of 14x."

At 1340 BST, the shares were up 3.7% to 420p, having fallen sharply the day before.