Broker sees potential in undervalued Next

Next was one of the winners at Christmas, and said in January that full-year profits would come in ahead of expectations at between £490m and £500m. Since then the retailer has bought back tranches of shares. Investec analyst Katharine Wynne expects more to come and said Next, which was trading at a discount to the general retail sector average at the turn of the year, remains undervalued.

The broker maintained: “We do not see Next as facing greater maturity issues than the majority of its UK retail peers.

“It has growth opportunities in both the UK - Home standalone and Lipsy - and now potentially overseas - mainly online - but we do not see these as capital-hungry so capex is not expected to exceed depreciation in the next couple of years.

“Thus in full-year 2011 we could see scope for a buy-back of another 6% to 7% of the equity. Although resuming buy-back activity has led to the now traditional derating, at 10 times P/E the shares are at the bottom end of their normal range.”

Wynne concluded: “Barring another market meltdown, the current valuation should provide a floor for Next’s share price. The sector roll-over since the new year has created a buying opportunity.”

Investec left its £23.80 share price target unchanged, partly “given the risk the general retail sector continues to derate ahead of the general election and the uncertainties this presents.”