DFS Furniture PLC

DFS Furniture PLC (LON: DFS) is a FTSE All-Share listed Company, which deals in the retailing of living room furniture in the UK.

Next Trading Update: On 12 January 2022, DFS expects to release its H1 FY22 post close trading statement.

Rationale for Valuation – BUY at GBX 232.00

• Resilient Trading: DFS leveraged its large scale, long-standing relationships, and operating experience to deliver financial growth in FY21, despite the Covid-19 led disruptions.
• Growth Drivers: The pent-up demand for furniture with remote working, market share gains, high closing order book, incremental efficiency savings, and integration of Dwell into the DFS brand operating structure holds potential for generating incremental shareholders’ value.
• Positive Technical Stance: From a technical standpoint, 14-day RSI (~25.21) is in the oversold territory, while the stock price is hovering close to the lower standard deviation of the Bollinger Bands.
• Better Profitability: In FY21, net margin and return on equity were significantly higher than the industry median of 4.6% and 9.2%, respectively.

Key Risks

• Subdued Consumer Sentiments: As the Bank of England decided to hike interest rate to combat inflation, it has tightened the monetary policy and can impact the consumer’s disposable income.
• Omicron Variant: The new restrictions in place to curb the spread of Omicron variant, can impact retailers.

Financial Highlights (for the 52 weeks ended 27 June 2021, as on 23 September 2021)

(Source: Company Website)

• Top-line Growth: During FY21, DFS recorded a 9.7% year-on-year revenue growth despite the Covid-19 disruption.
• Stronger Financial Position: There was a significant reduction in net bank debt to £19.0 million, following the solid growth in earnings per share.
• Dividend: The dividend had been reinstated with a final dividend of 7.5 pence per share, reflecting the strong capital & distribution policy.

One Year Share Price Chart

 (Data Source: Refinitiv, Analysis by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY22) (Illustrative) 

Conclusion

The strong demand and trading momentum seen in Q4 FY21 is expected to sustain in H1 FY22 and support the revenue and profit growth. The order book remained ahead of normal levels, which has strengthened the confidence in the outlook. Moreover, it has increased output capacity and resource levels to capitalise on the strong demand opportunities. The stock made a 52-week high and low of GBX 318.50 and GBX 203.00, respectively.

Based on the strong trading performance, financial growth, favourable market dynamics, and support from the valuation as done using the above method, we have given a “BUY” stance on DFS Furniture PLC at the current market price of GBX 232.00 (as on 17 December 2021, at 10:20 AM GMT), with lower double-digit upside potential based 9.91x Price/Earnings (approx.) on FY22E Earnings Per Share (approx.).

GRC International Group PLC

GRC International Group PLC (LON: GRC) is a FTSE AIM All-Share index listed entity that addresses the cyber security, risk management and compliance requirements of organisation.

Rationale for Valuation – SPECULATIVE BUY at GBX 27.50

• Growth Drivers: The improvement in net promoter score, 21% increase in website visits, comprehensive suite of products and services, and strong revenue and billings growth across the business.
• Market Drivers: GRC operates in fragmented and rapidly growing international markets, while the Company has growing forward visibility to grow organically.
• Financial Growth: With considerable top-line growth in H1 FY22, there was a substantial 67% reduction in loss before tax of £0.5 million (H1 FY21: £1.5 million loss).
• Technical Indicator: From a technical standpoint, GRC’s stock price is approaching the lower Bollinger Bands, reflecting an oversold scenario. Meanwhile, 14-day RSI (~14.78) is also reiterating the same.

Key Risks

• Interest Rate Hike: The Bank of England has raised interest rates for the first time since the pandemic started.
• Inflationary Pressure: British consumer price inflation surged to its highest in more than 10 years in November, jumping to 5.1% from October's 4.2%.

Financial Highlights (for the six months ended 31 September 2021, as on 14 December 2021)

 (Source: Company Website)

• Top-line Growth: During H1 FY22, revenue jumped 22%to £6.6 million (H1 FY21: £5.4 million).
• Margin Growth: The gross margin surged to 58% in H1 FY22, reflecting an increase of 800 basis points year-on-year, on the back of operational gearing from subscription services and improved utilisation rates.
• Financial Position: At end of H1 FY22, net cash stood at £0.1 million (H1 FY21: £0.2 million), while the borrowings (excluding lease obligations) surged to £1.3 million (H1 FY21: £1.2 million).

One Year Share Price Chart

 (Data Source: Refinitiv, Analysis done by Kalkine Group) 

Conclusion 

GRC demonstrated strong organic revenue growth, improved margins, and positive EBITDA in H1 FY22. Moreover, the surge in customer satisfaction, strong active subscriber base, increased website visits, and increased recurring revenue underpins the Company’s potential to grow further and deliver an incremental value for its shareholders. The stock made a 52-week High and Low of GBX 47.00 and GBX 21.00, respectively.

Nevertheless, GRC is a high risk-reward stock, which is presently trading with a small market capitalization, which makes it a quite speculative counter. Therefore, investors should punt on this stock post accessing their respective risk-return profile.

Based on the top-line growth, increased billings, margin improvements, loss reductions, strong net cash position and operational achievements, we have given a “SPECULATIVE BUY” stance on GRC International Group PLC at the current price of GBX 27.50 (as on 17 December 2021, at 8:00 AM GMT).  

*All forecasted figures and Peer Information have been taken from REFINITIV.

*The reference data in this report has been partly sourced from REFINITIV.

*Dividend Yield may vary as per the stock price movement.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

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