Canaccord lowers Sports Direct's price target due to rising expansion costs
Canaccord Genuity has maintained its rating on Sports Direct at ‘sell’ but has lowered its price target to 160p from 231p due to the company’s expensive expansion plans.
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Sports Direct is planning to change its strategy from being a heavily discounting third-party branded product towards becoming the "Selfridges of sports retail" through freehold flagship stores.
“The cost of implementing this strategy will be high and we have adjusted our capex, depreciation and interest cost forecasts to reflect this,” said the bank.
According to the company, it intends to spend potentially in excess of £300m of its own resources and a bank facility of £788m to invest on property asset acquisitions over the next two to four years.
Guidance for the full year 2017 capital expenditure is now £480m and depreciation and amortisation is expected to be £130m, up from the bankers’ previous valuations of £93m and £130m.
The broker’s underlying earnings before interest, tax ,depreciation and amortisation (EBITDA) forecasts have not changed materially, but the increase in depreciation guidance, as well as higher interest costs drives a 10-18% reduction in full year 2017-2019 profit before tax estimates.
“The net result is that our price target falls from 231p to 160p. We are taking management's guidance on costs at face value without assuming any resultant upside to trading. This may be harsh, but given the turmoil in the business to date and early stages of the new strategy it is hard to be more optimistic.”
Sports Direct’s share price fell 0.46% to 279.10p at 1218 GMT on Thursday.