Broker tips: JD Sports, Knights Group

(Sharecast News) - JD Sports should prove to be one of the more resilient models in the European general retail sector this year, RBC Capital Markets said in a note on Monday. The bank highlighted JD's strong brand relationships and its appeal to younger shoppers, for whom sports fashion is a high priority purchase.

"The outlook should improve in H2, following the FY results and the annualisation of tough comps in the US," it said.

RBC noted that JD has a strong balance sheet and trades at 12x CY22E price-to-earnings, which it thinks fails to reflect its longer-term growth potential. It also pointed out that Nike was clear on its third-quarter results call last week that it has finished the adjustments it is making to wholesale partners and allocations.

"While it is difficult to have visibility on the long term, we think JD is well placed to build on its strong relationship with Nike due to its ability to offer access to a more cash-based urban customer, its buying, merchandising and data analytics expertise, and as it can help to growth Nike's apparel business in elevated stores," it said.

RBC rates JD Sports at 'outperform' with a 250.0p price target.

Analysts at Berenberg slashed their target price on legal and professional services business Knights Group from 410.0p to 165.0p on Monday following the firm's recent trading update.

Berenberg noted that Knights' full-year update last week had guided to an expected 3.7% revenue downgrade to £126.0m for 2022, with complete drop-through driving a 23.1% downgrade at the adjusted pre-tax profit level to £18.0m.

The German bank, which has a 'hold' rating on the stock, also highlighted that company had cited the impact of the Omicron Covid-19 variant, as well as a softening in business confidence and an associated slowdown in corporate work, as being the main drivers.

"Management has suggested it prudent to revise FY23 organic growth estimates down to circa 5% with margins rebuilding to historical levels 'over time'," said Berenberg.

Berenberg stated that following a significant de-rating for the stock, with shares now on a 7.6x full-year price-to-earnings ratio, it was also easy to argue a 'buy' case for Knights if one was to believe the model was capable of being sustained over the medium to long run.

However, Berenberg said it continues to question Knights' aggressive M&A strategy and suggestion of high churn while it awaits evidence of the multi-year success of acquisitions.