Dunelm Group Plc

Dunelm Group Plc (LON: DNLM) is listed on the FTSE 250 index. The Company is focused on the UK Homewares market with nearly 174 stores.

On 8 September 2021, DNLM would release its FY2021 annual results.

The last dividend of GBX 12.00 per share was paid on 9 April 2021 (interim dividend).

Investment Rationale for Valuation – Buy at GBX 1,305.00

• Currently, there is a rising demand trend for new homes in the UK. Hence, it could drive the demand for DNLM’s homeware offerings.
• DNLM recently committed to two more distribution facilities. These facilities would create additional capacity and drive future growth.
• On the profitability front, DNLM has a significantly higher net margin than the industry median of 3.5% in H1 FY2021.
• On the liquidity front, DNLM has a higher current ratio than the industry median of 0.97x since H2 FY2020.
• On the technical front, the 14-day RSI at about 39.61 is moving towards the oversold zone, indicating a potential uptick in the stock price in the near term.

Key Risks

• Muted consumer confidence and household disposable income could affect the demand for DNLM’s offerings, impacting its margins.
• The dividend payment could put pressure on the Company’s liquidity.
• Any disruption in the supply chain could increase the costs to the Company, affecting its margins.
  

Q4 FY2021 Trading Update (released on 14 July 2021)

(Source: LSE Website)

• Driven by stores re-opening on 12 April 2021 and pent up demand from the customers, sales were up 101.7 YoY% during Q4 FY2021 and 26.3% YoY during FY2021.
• Moreover, strong appeal for DNLM’s homewares led to Q1 FY2021 sales increasing 43.9% from the pre-Covid Q1 FY2019 sales. Also, FY2021 sales were up 21.4% from the FY2019 level.
• The solid sales momentum led to Q4 FY2021 gross margin improving by 460 bps YoY and FY2021 gross margin rising 130 bps YoY.
• This good performance resulted in net cash position rising to £129 million on 26 June 2021 from £45 million in FY2020.

One Year Share Price Chart

(Source: Refinitiv, Analysis done by Kalkine Group)

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

Conclusion

The Company achieved a much better result than pre-Covid 2019 levels in FY2021, driven by digital sales growth. However, it has also performed better than the market since its store re-opening. The management would increase its investment levels in FY2022 to drive further growth and enhance its digital capabilities. The stock made a 52-week low and high of GBX 1,114.00 and GBX 1,601.48, respectively. 

Based on rising demand for new homes, the Company’s solid performance in FY2021, strong demand from its customers, the Company’s better profitability and liquidity position than the industry, and support from valuation as done using the above method, we have given a “BUY” recommendation on Dunelm Group Plc at the current market price of GBX 1,305.00 (as of 5 August 2021 at 8:35 AM GMT), with a lower double-digit upside potential based on 22.59x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.).

*All forecasted figures and Peer information have been taken from Refinitiv.

*The dividend yield is subject to change as per the stock price movement.

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

*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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