Broker tips: FirstGroup, retailers

The outlook appears to be stabilising at bus and trains firm FirstGroup, but Nomura worries that it will take time to get debt levels down to sector averages.Plans to reduce the high levels of debt "look sensible", says the broker. Wednesday's final results revealed net debt fell to £2.28bn in the year to 31 March from £2.50bn in 2009.Its net cash generation target has been increased to £150m for 2010/11."We have slightly increased our valuation to take account of the higher net cash generation in 2011," Nomura says, but the 'reduce' rating remains and the target price rises just 10p to 375p."Our price target still assumes a 10% discount for the leverage, which is still above sector averages."The recent stock market sell-off has presented buying opportunities in the clothing sector, despite the likelihood that attempts to tackle the budget deficit will put further pressure on consumer spending.Analysis conducted by Panmure Gordon reveals clothing purchases have been less discretionary than, for example, household goods purchases over the past 3- 5 years.That was backed up by retail sales data from the BRC published earlier this week. "We think that recent share price falls due to global uncertainty have provided buying opportunities in this subsector," writes Panmure analyst Jean Roche. "Specifically, we think Next, M&S, and Ted Baker look undervalued."Roche has M&S as a 'buy' with 405p price target. The high street giant recently reported market share gains in clothing where the broker sees growth as well as cost-saving opportunities. "We see considerable upside in young fashion brand Ted Baker (Buy, 608p target) shares, which are trading on an almost 40% discount to our basket of international peers," Roche adds. Others worth a mention include NBrown, rated a 'buy' with 315p target, and ASOS, also a 'buy', with 635p target.A visit to Debenhams' Danish acquisition Magasin du Nord has prompted KBC Peel Hunt to make some modest upgrades to its earnings estimates for the department store.While it represents less than 10% of the total group's sales, Magasin du Nord's gross margin is fully 1,000 basis points adrift from Debenhams core business, the broker notes. Thus KBC thinks there plenty of 'low hanging fruit' for Debenhams to pick as it ameliorates this state of affairs.KBC also wonders whether the Magasin du Nord acquisition may be 'the first of many.''With other department store groups and brands in its sights, we believe Debenhams will continue to be acquisitive given the clear success of recent corporate transactions,' the broker says.KBC has a 'buy' recommendation and a 100p target price on Debenhams.'Debenhams remains fundamentally undervalued,' it says. 'With continued profit growth at home and abroad driven principally by margin opportunity, we believe it is well placed to deliver earnings growth, despite concerns of a more austere UK economic backdrop.'