Dunelm Group PLC

Dunelm Group PLC (LON: DNLM) is an FTSE 250 index-listed homewares retailer.        

Investment Rationale for Valuation – Buy at GBX 859.90

• Trading Update: As updated by the Group on 14 April 2022, it reported total sales of £399 million in Q3FY22, reflecting a year-on-year jump of 69%.
• Gain in Market Share: The company has witnessed a gain in market share in Q3FY22, in both the segments of homewares and furniture. The Group has reported that around 85% of its growth over the past five years is due to the positive impact of market share gains.
• Channel Growth: The Group has sustained growth momentum in store sales and digital sales during the third quarter of FY22, with digital sales being reported at more than double the level of two years ago period.
• Technical Indicator: The price of the stock is hovering near the lower Bollinger band with 14-day RSI level of 24.49.   

Key Risks

• Inflation Risk: As the UK economy grapples with inflation, there is a risk of it being pushed to recession in the near term. This can impact retail sales and discretionary spending.
• Interest Risk: In order to combat the rising inflation, the Central Bank has raised the interest rates, indicating a sharp fall might happen in households’ income. This also translates to higher cost for financing the debt facilities of the company.  

Financial Highlights (for the quarter ended 26 March 2022, as of 14 April 2022)

(Source: Company Website)

• Sales: Total sales year-to-date FY22 grew by 25% to £1,195 million, compared to the prior corresponding period.
• Digital Contribution: The company reported digital revenues being 35% of total sales in Q3FY22.  

One Year Share Price Chart

(Source: REFINITIV; Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY23E)

*Peers: Peers considered are Frasers Group PLC, Tesco PLC and Vivo Energy PLC.

*All selected peers are LSE-listed Companies from the Consumer Discretionary sector.  

Conclusion

The management expects that PBT in FY22 will be in line with market expectations, despite the uncertainty in macro-economic situation.    

The stock made a 52-week high and low of GBX 1,599.00 and GBX 851.22, respectively.

Based on the decent performance, gain in market share and support from the valuation as done using the above method, we have given a “Buy” recommendation on Dunelm Group PLC at the current market price of GBX 859.90 (as of 16 May 2022, at 08:20 AM GMT+1) with lower double-digit upside potential based on 12.52x Price/NTM Earnings (approx.) on FY23E earnings per share (approx.).

Please note 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.

Note 1: The reference data 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.

Note 5: ‘Kalkine reports are prepared based on the stock prices captured either from the London Stock Exchange (LSE) and or REFINITIV. Typically, both sources (LSE and or REFINITIV) may reflect stock prices with a delay which could be a lag of 15-20 minutes. There can be no assurance that future results or events will be consistent with the information provided in the report. The information is subject to change without any prior notice.’

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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