SCS Group PLC (LON: SCS)  

SCS Group PLC is an FTSE Main Market listed Company engaged in the retailing of upholstered furniture and flooring. Moreover, it focuses on the sale of fabric & leather sofas and sells a range of branded & ScS branded products under registered trademarks, including Endurance and SiSi Italia. The Company has a network of 100 stores across the UK.

On 22 March 2022, SCS will release H1 FY22 results.

Recent Trend of Dividend Payments

SCS is following a progressive dividend policy and intend to keep earnings cover ranging from 1.25x to 2.00x. Moreover, it had paid a final dividend of 7.00 pence per share on 10 December 2021 with an ex-dividend date of 11 November 2021, taking a full-year FY21 dividend to 10.00 pence per share. In comparison, the Company was unable to pay any dividend during FY20 because of the adverse circumstances.

Growth Prospects

• Strong Industry Dynamics: According to the Office for National Statistics, the volume of goods sold in UK stores and online went up by around 1.9% in January 2022 after witnessing a 4% plunge in December 2021.
• Launch of New Website: The Company had improved the omnichannel offerings with the launch of a new website. Furthermore, it had helped the online sales to surge by around 146.0% during FY21 when compared with the prior-year levels.
• Robust Order Book: The Company’s order book stood at £148.0 million as of 29 January 2022, around a 100% increase from the order book as of 25 January 2020.

Key Risks

• Ukraine Tension: The mounting concern over the Russian invasion in Ukraine can continue to weigh on the equity market.
• Record UK Inflation: The annual rate of UK consumer price inflation reached 5.5% in January 2022, the highest since March 1992. Thus, it can adversely impact the London equities.
• Wrong Strategic Choices: The failure of partner relationships could adversely impact the business in the near term.

Key Fundamental Statistics & Shareholding Pattern of SCS Group PLC.

M & G Investment Management Ltd. Is the most significant shareholder as it holds nearly 4.60 million shares as of 31 December 2021.     

Interim Trading Update (for the 26 weeks ended 29 January 2022, as on 03 February 2022)

• Online Business: The Company’s online business improved by around 55.8% compared to the equivalent 26-week period to 25 January 2020.
• Order Intake: SCS had shown a like-for-like order intake growth of approximately 16.6% during the period when compared with H1 FY21.
  

FY21 Financial & Operational Highlights (for 53 weeks ended 31 July 2021, as of 05 October 2021)

(Source: Company Filings)

• Robust Increase in Revenue: Despite of challenging backdrop of the Covid-19 pandemic, SCS managed to drive revenue higher by around 21.6%, from £255.5 million during FY20 to £310.6 million for FY21.
• Marginal Cash Improvement: With regards to the balance sheet, the Company had improved the cash balance from £82.30 million at the end of FY20 to £87.70 million as of 31 July 2021.
• Strong Online Sales: The Company had managed to boost online sales as it got increased by around 146.0% to £46.9 million, driven by a change in shopping patterns due to the emergence of the Covid-19 pandemic.
  

Financial Ratios (FY21)

Share Price Performance Analysis 

(Source: Refinitiv; Analysis done by Kalkine Group)

On 03 March 2022, at 11:13 AM GMT, SCS’s shares were trading at GBX 188.05, up by around 1.65% from the previous day closing price. Stock 52-week High and Low were GBX 340.50 and GBX 185.00, respectively.

From a technical standpoint, the stock price is hovering around the lower Bollinger band, indicating a bullish price momentum. Meanwhile, the 14-days RSI of ~38.22 approaches an oversold territory.

Valuation Methodology: Price/Earnings Approach (FY22E)

Business Outlook

SCS has reported outstanding FY21 results with robust top-line revenue growth and switched back into profitability. Moreover, SCS adapted well after the emergence of the Covid-19 pandemic and launched a website to attract customers shopping online following the store closures. Meanwhile, the Company is working closely with suppliers to mitigate the risk of continued supply chain disruption during the second half of FY22. Furthermore, the Company has witnessed a strong order intake, illustrated by a robust trading in its key winter trading period. In a nutshell, the Company aims to generate significant returns for the shareholders and remain on track to meet full-year expectations.

Markets are trading in a highly volatile zone currently due to certain macro-economic and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

Considering the strong order intake during H1 FY22, strong growth in dividend payments, turnaround into profitability, and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on SCS Group PLC at the current market price of GBX 188.05 (as of 03 March 2022 at 11:13 AM GMT), with lower-double digit upside potential based on 7.81x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.).

Note 1: The reference SCS in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Note 3: Dividend Yield may vary as per the stock price movement.

Note 4: Target Price refers to a price level which the stock is expected to reach as per the relative valuation method and or technical analysis taking into consideration both short-term and long-term scenarios. 

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavorable movement in the stock prices.

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