Broker snap: Nomura turns bullish on UK retailers

Nomura has lifted its view on the UK retail sector from 'neutral' to 'bullish', even though the category has outperformed the wider market so far this year.The broker said that lower taxes and high social security - "hardly a recipe for confident spending" - have propped up disposable income over the past five years, but much has been plugged into services (coffee shops, weekends away) rather than non-food retail sales.As such, the sector has restructured: "Retailers have raised their game, making costs flexible, and improving services and in-store experience", Nomura said. Meanwhile, store space has declined and balance sheets have been put on a "stronger footing".The broker said that sentiment in the sector year to date has been buoyed by positive commentary, particularly regarding the housing market.Nomura said: "The beneficial effects of 'Funding for Lending' are stimulating greater housing activity and reducing mortgage costs, while 'Help-to-Buy' schemes may encourage more first-time buyers, which in turn could lower the level of net housing equity injections that have been the primary driver of the higher savings ratio."We estimate an annual reduction of c£10bn is possible. Given non-food retail sales of £145bn, the sector gaining some share of this is a tantalising prospect."The broker expects UK profits to rise by 4.0% this year and 9.0% in 2014.Nomura has raised its recommendation for electrical retailer Dixons from 'neutral' to 'buy', lifting its target price from 31p to 60p, saying the company has addressed the challenges of online price transparency and relative costs and will continue to benefit from capacity exit. "Upside lies in its ability to restructure its loss-making online and Southern European operations."Home Retail, while still regarded as a "work in progress" given the turnaround at its Argos chain, has also been upgraded from 'neutral' to 'buy' (target price raised from 155p to 200p).Meanwhile, DIY retailer Kingfisher has been raised from 'reduce' to 'neutral' (target price up from 280p to 380p), given its exposure to a potential housing recovery.'Neutral' ratings have been maintained for Debenhams, Dunelm, Inchcape, Next and WH Smith.BC