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UBS posts an upgrade for Card Factory as it turns positive on growth prospects

In a note to clients, analysts expected external cost pressures to ease along with a stabilisation in cash flow, which would help lead to growth in outer years

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UBS also highlighted the company’s competitive strengths that could help increase market share

UBS has upgraded Card Factory PLC (CF) (LON:CARD) to ‘Buy’ from ‘Neutral’ as the Swiss bank turned positive on growth prospects for the FTSE 250 retailer.

In a note to clients, analysts expected external cost pressures to ease along with a stabilisation in cash flow, which would help lead to growth in outer years.

READ: Card Factory's price target cut by Liberum

“FX headwinds will fade in FY19 and become a small tailwind in FY20, and there are clear opportunities to offset any ongoing headwinds.

“Cost saving opportunities include the benefits of EPOS in reducing instore tasks and queue busting and rent reductions due to other retailers closing High Street space. c.60% of FY18 CF store openings were on the High Street, and occupancy cost/sales fell 80bps”.

UBS also highlighted the company’s competitive strengths that could help increase its market share: “vertical integration, the development of an omni-channel offer in an underdeveloped online market, and improved convenience from a growing store footprint will accelerate market share gains as capacity reduces.

“CF has seen its value market share increase from c.10% in 2008 to c.18% as key competitor Clintons has seen share fall from c.20% to c.9%, and we expect to see this trend continue.”

However, the bank also predicted a decrease in EBITDA for 2019, dropping its estimate by 1.5% to £94.5mln, while upping its like-for-like (LFL) sales estimates to 3% from 2.5%.

“As a retailer with a range of long-standing, fixed price points, margins have been severely affected by sterling weakness post Brexit and by the Minimum Wage increase. Adverse mix has also affected margins, although non-card has been a driver of LFL. As we pass through these cycles, margin pressure will abate and visibility will improve” analysts said.

Shares in Card Factory were up 3.3% at 237.4p in mid-morning trading Friday

Quick facts: Card Factory

Price: 155.832 GBX

LSE:CARD
Market: LSE
Market Cap: £532.24 m
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