Investing.com -- Shares in London-listed retailer B&M European Value Retail fell 3% after J.P. Morgan placed the stock on negative catalyst watch ahead of half-year results on Nov. 12, saying the balance of risk and reward looks lopsided.
The brokerage kept its "underweight" rating and raised its March 2028 price target to 201 pence from 190 pence, implying about 30% downside.
J.P. Morgan said the shares have risen about 70% this year and about 40% in three months, and now trade at a premium to the sector.
B&M trades at about 13.5 times expected earnings over the next year, a 5% premium to the sector.
Consensus forecasts assume UK like-for-like sales return to sustained growth at no extra cost to margins, with no particular timing in the year, J.P. Morgan said. It disagrees and sits high single-digit to double-digit percentages below consensus on lower margin assumptions.
The brokerage said it agrees with management on the focus areas of its "Back to B&M Basics" plan, but expects progress to come at higher cost and with more volatility than consensus estimates.
J.P. Morgan now forecasts second-quarter UK like-for-like sales of 0%, versus 1% before, citing the subdued outlook for UK food prices and weak read-across from peers.
It expects gross margin to fall 20 basis points in the first half, after a 140 basis point fall a year earlier, as execution and mix benefits almost offset the cost of price cuts. It forecasts UK operating margin down 150 basis points in the first half, after a 360 basis point reset in the last financial year, with the margin still dragged by higher operating costs relative to sales.
For the first half, J.P. Morgan's EBITDA and earnings per share forecasts are high single-digit percentages below consensus, with EBITDA margin 50 basis points lower. For the full year, they are 10% and 15% below, with EBITDA margin 80 basis points lower. It cut its full-year earnings per share forecast by 3% and raised its forecast for the following year by 9.7%.
B&M's first-quarter UK like-for-like sales fell 2.3%, against a consensus forecast of a 1.3% fall, partly because of a soft garden season. France like-for-like sales rose 5.3%.
In the last financial year, second-half earnings per share missed expectations by 20%, and adjusted EBITDA was £459 million, down 25.9%, because of lower trading margins and UK operating cost inflation.
B&M gave no guidance for the current year. It has said it will measure guidance by adjusted pre-tax profit and share the range with its half-year results.
J.P. Morgan said B&M would need to reassure on all fronts for current valuations to hold. It placed Sainsbury's on positive catalyst watch ahead of its half-year results. Tesco shares are up 20% this year, it said.
Upside risks to its view include food inflation staying elevated for longer, a smoother-than-modelled integration of Wilko, and successful bolt-on acquisitions.
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