DFS Furniture PLC – Performing ahead of expectations on strong consumer demand.

DFS Furniture PLC (LON: DFS) is a FTSE All-Share listed Company, which deals in the retailing of living room furniture in the UK. It manufactures, designs, and distributes living room and upholstered furniture products since 1969.

On 24 September 2020, it is expecting to announce FY20 results.

Investment Note – Speculative Buy at GBX 161.09
 

1. Performing significantly ahead of expectations over the past six weeks.

2. Experiencing strong consumer demand in online as well as own showrooms.

3. Trading below 52-week mid-price while 20-day SMA indicates an upward trend.

4. Delivered ~12.9% return in last one month.

Recent News

23 April 2020: The Company raised approximately £64 million in gross proceeds by issuing 42,606,119 new ordinary shares, representing 19.9% of the existing issued ordinary share capital.

Trading Update (as on 25 August 2020)

In this update, DFS affirmed that it continued to trade strongly in own showrooms as well as in online channel, with robust growth in order intake over the past six weeks (year-on-year). Therefore, the trading was significantly ahead of expectations in the last six weeks, and it shall give additional revenue benefit of nearly £100 million in FY21. The revenue growth is driven by the latent demand since consumers are currently spending more on their homes relative to other sectors. In FY20 (or the 52-week trading period ended 28 June 2020), the Company is expecting to report the revenue of nearly £725 million (down by £271 million year-on-year). As of 28 June 2020, it had cash resources of over £160 million.

One Year Share Price Chart

 
1-Year Chart as of 26 August 2020, before the market close (Source: Refinitiv, Thomson Reuters)

Risk Assessments

The dampened consumer confidence with recessionary economic conditions can impact the demand beyond the short-term latent consumer demand. Brexit uncertainties can put cost pressure while it is already facing excessive competition.

Valuation Methodology

Conclusion

DFS is the clear leading retailer of UK’s living room furniture market, which operates with an omnichannel network. It has nearly 50 years of operating history and has grown gradually over the years. It is encouraged by the positive trading momentum, which shall increase their earnings resilience. The strong revenue growth will significantly strengthen the financial headroom as well. Although the Company could not provide financial guidance; however, it is confident that the business is well-positioned to capitalise on opportunities as the market recovers.

Stock 52 week High and Low were GBX 302.00 and GBX 101.80, respectively. From the technical standpoint, shares were trading well above the short-term support level of 20-day simple moving average prices, which reflects an uptrend in the stock and carrying the potential to move up further.

Over the past three years (FY16 – FY19), the company’s revenue surged from GBP 756.00 million in FY16 to GBP 901.00 million in FY20. Compounded annual growth rate (CAGR) stood at 6.02 percent.

Based on strong demand and business resilience as discussed above, we have given a “Speculative Buy” recommendation on DFS Furniture at the current market price of GBX 161.09 (as on 26 August 2020, before the market close at 1.28 PM GMT+1) with lower double-digit upside potential based 1.30x EV/Sales (approx.) on FY20E Sales (approx.).

 
Saga PLC – Completed the disposal of Bennetts Motorcycle to Ardonagh Group

Saga PLC (LON: SAGA) is a FTSE All-Share Company, which provides products and services related to general insurance, personal finance, package, and cruise holidays. It operates through three segments, namely Insurance, Travel, and Emerging Businesses and Central Costs.

Investment Note – Speculative Buy at GBX 13.07
 

1. Diversified business model underpins resilience for a prolonged period.

2. Entered FY21 with lesser debt and improved cash flows.

3. Completed the sale of Bennetts.

4. Trading multiples (Price/Earnings, Price/Book, Price/Cash Flow, EV/Sales, and EV/EBITDA) are lower as compared to Insurance or Financials industry.
 

Recent News

7 August 2020: The Company completed the disposal of Bennetts Motorcycling Services Limited to Atlanta Investment holdings C Limited, for the net disposal proceeds of around £23 million. 

AGM Trading Update for the period from 1 February to 21 June 2020

As per update released on 22 June 2020, the trading performance during the period for Insurance business for resilient and it continued to make progress driven by three-year fixed-price policies. However, the travel business remained on pause due to Covid-19 restrictions since mid-March. In Healthcare division, the Company announced the disposal of two domiciliary healthcare companies - Country Cousins and Patricia Whites.

Liquidity Position:As of 31 May 2020, SAGA’s liquidity position stayed strong, with total cash of £62 million and undrawn £50 million of revolving credit facility (RCF). For a debt holiday and covenant waiver, it had signed an agreement, for the deferral of £32 million principal payments (which were due up to 31 March 2021).

One Year Share Price Chart

 
1-Year Chart as of 26 August 2020, before the market close (Source: Refinitiv, Thomson Reuters)

Risk Assessments

Climate change can potentially affect the severity and frequency of claims. The advent of the autonomous vehicle can disrupt the motor insurance business. Travel business remained challenging due to Covid-19 restrictions.

Valuation Methodology

Conclusion

In the short-term, the Company plans to reduce leverage and preserve cash. It will continue the progress in Insurance business while maintaining a tight focus on cost and efficiency. During the above-mentioned period (from 1 February to 21 June 2020), the Company had delivered £15 million of run-rate cost savings. Moreover, it has entered FY21 with improved cash flows and lesser debt. The Insurance business has been performing strongly even during the COVID-19 mayhem. Overall, the business is resilient due to the diversified business model and differentiated product portfolio. The financial guidance remained uncertain; however, the Company is confident that Insurance and Travel businesses have a successful future ahead, against the backdrop of Covid-19.

Stock 52 week High and Low were GBX 60.00 and GBX 12.51, respectively. From the technical standpoint, 14-day RSI is currently in an oversold zone, which means there is a good potential for a short term rebound in the stock price.

Based on the decent prospects and factors as discussed above, we have given a “Speculative Buy” recommendation on SAGA at the current market price of GBX 13.07 (as on 26 August 2020, before the market close at 2.10 PM GMT+1) with lower double-digit upside potential based 6.12x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).
 
*All forecasted figures and Industry/Peer Information have been taken from Refinitiv, Thomson Reuters.
*Dividend Yield may vary as per the stock price movement.

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