- Profit guidance slashed
- Price hovers around NAV
A cut to guidance caused DFS Furniture's (DFS) shares to slump 6 per cent on the morning of its half-year results release. The downbeat mood wasn't because the sofa retailer's interim sales, earnings and profit sank (the market expected that already due to guidance posted in January) but because it predicted tougher times in the months ahead.
The company said "weaker market demand" meant it now expected pre-tax profit for the year to the end of June to be around £20mn-£25mn, after having told the market as recently as January that it was still on target to hit £30mn-£35mn. The reversal wasn't well received, but at least DFS is prepping investors for further bad news, noting that its guidance drop "exclud[es] the potential risk of Red Sea delays which we continue to monitor closely". Meanwhile, its sales guidance was pared back, the company having already reported weaker performance in January due to "record hot weather in September and early October".
The question is how many of these trading issues are temporary, and to what extent they are reflected in the market valuation. The business's growth trajectory looks far from guaranteed, especially when unseasonably toasty early Autumn sunshine can knock it off course. Hotter weather is something all companies should prepare for in a warming world, but the DFS supply chain appears vulnerable.
However, despite the occasional blip, DFS's long-term revenue growth looks good. While past events are not an indicator of future performance, sales have grown steadily over the past decade, and the analyst consensus forecast is that they will keep growing, notwithstanding the expected drop this year. The expectation is that this will give DFS scope to pay a 7.82p dividend per share for the year to June 2026.
That would still be far from pre-Covid, but the market has priced that into the shares and then some. Right now, DFS trades at around net asset value per share, which we feel undervalues the growth potential for this business. And should the consensus forecast earnings for the 12 months to 2025 prove correct at 14.7p per share, DFS currently trades at just seven times that. In short, while investing in this stock involves a lot of assumptions around trading improvements (and interest rates), we believe the price is low enough to justify a speculative punt. As such, we maintain our rating. Buy.
Last IC view: Buy, 114p, 21 Sep 2023
DFS FURNITURE (DFS) | ||||
ORD PRICE: | 104p | MARKET VALUE: | £264mn | |
TOUCH: | 104-106p | 12-MONTH HIGH: | 155p | LOW: 95.9 |
DIVIDEND YIELD: | 3.9% | PE RATIO: | 14 | |
NET ASSET VALUE:* | 99.8p | NET DEBT: | 234% |
Half-year to 24 Dec | Turnover (£mn) | Pre-tax profit (£mn) | Earnings per share (p) | Dividend per share (p) |
2022 | 545 | 6.80 | 2.30 | 1.50 |
2023 | 505 | 0.90 | 0.20 | 1.10 |
% change | -7 | -87 | -91 | -27 |
Ex-div: | 18 Apr | |||
Payment: | 30 May | |||
*Includes intangible assets of £536mn, or 229p a share |