N+1 Singer keeps 'buy' on M&S as 'significant' potential remains

In reaction to fourth quarter results from Marks and Spencer, broker N+1 Singer said the lack of visible revenue improvements was continuing to test investor resolve, but that these numbers provided some small encouragement, enough to maintain a 'buy' recommendation. Singer analysts Matthew McEachran and Mark Photiades said there was "no doubting the massive amount of change being implemented across the group", both in terms of customer-facing and back-of-house projects, and should these changes gain traction the potential is "significant", especially for cutting costs. "The recent pressure on forecasts is disappointing but given the current valuation metrics we remain buyers on the back of the targeted transformation of the offer and improving in-store proposition," the pair wrote.The interim management statement (IMS) showed period sales broadly in line but margins slightly weaker, meaning minimal full year changes would expected.The analysts observed that speculation had again been rife about weakness in quarter four, but the numbers were "fractionally better versus expectations, giving something to counter the bearish general tone amongst spectators". The food gross margin has been slightly better than expected but this was more than offset by a weaker than expected gross margin from general merchandise, meaning the full year was now inked in for a 20 basis point decline compared to a flat outcome previously expected but not a total surprise. "We suspect cost savings may have broadly offset the gross margin shortfall," the pair added.Any changes to forecasts today are likely to be minimal if at all, meaning M&S trades on a March 2015 P/E ratio of 13 times, with a 3.9% yield. "It is worth noting that as a period of heavy investment draws to a close cashflow is now expected to dramatically improve with our forecasts currently assuming a £0.5bn net debt reduction over two years."OH