SCS Group PLC

SCS Group PLC (LON: SCS) is a FTSE All-Small index listed retailer of upholstered furniture and floorings.

Rationale for Valuation – SPECULATIVE BUY at GBX 208.00

• Turned Profitable: Following the 21% increase in gross sales, SCS Group turned profitable in FY21. Subsequently, it recommended a total dividend of 10 pence per share in FY21 against the nil dividend in FY20, reflecting confidence in the outlook.
• Strong Outlook: The outlook prospects are positive on the back of a strong order book and solid cash position.
• Liquidity: At the end of FY21, SCS held a cash balance of £87.7 million (FY20: £82.3 million).
• Technical: From a technical standpoint, the momentum oscillator 14-day RSI (~35.77) confirms the oversold position, while the price is hovering close to the lower Bollinger Band.
• Undervalued Multiples: On a forward 12-month basis – EV/Sales, EV/EBITDA, Price/Cash Flow, and Price/Earnings valuation multiples are undervalued than the median of the Consumer Cyclicals sector.

Key Risks

• Inflation Concern: British Consumer Price inflation surged to 5.4% in December 2021, putting pressure on the Bank of England to raise interest rates again.
• Subdued Consumer Confidence: There is acute pressure on consumer disposable income levels amid rising fuel price concerns. Moreover, the resurgence in Covid-19 cases can impact footfall as well.

AGM Trading Update (as on 26 November 2021)

• Orders: For the 16 weeks ending 20 November 2021, two-year like-for-like orders grew 0.9%, though the order was 10.6% down on a year-on-year basis due to the unprecedented pent-up demand at the beginning of last year.
• Order Book: As on 20 November 2021, the Company had an order book of £131.9 million, significantly higher than £71.5 million for the same period two years ago.
• Outlook: The Group is all set for the winter sales period and working closely with the supplier to mitigate supply chain challenges.

One Year Share Price Chart

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

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

Conclusion 

During FY21, the Group reported a 21.6%, 21.0% and 22.9% year-on-year growth in revenue, gross sales, and gross profit, respectively. The statutory earnings per share stood at 50.4 pence (FY20: loss per share 5.8 pence) on FY21. The Group has also launched its new website and repaid the £3.0 million for Coronavirus Job Retention Scheme grants. The stock made a 52-week High and Low of GBX 340.50 and GBX 185.50, respectively. 

Nevertheless, investors are also recommended to scan their respective risk-return profile before punting on this penny stock since it is exposed to high volatilities. 

Based on the decent financial growth, dividend recommendation, operational achievements, and favourable valuation conducted above, we have given a “SPECULATIVE BUY” stance on SCS Group PLC at the closing price of GBX 208.00 (as on 18 January 2022), with lower double-digit upside potential based 8.55x Price/NTM Earnings (approx.) on FY22E Earnings Per Share (approx.).

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. 

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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