DFS Furniture PLC – Encouraged by the strong trading momentum

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 Rationale – Speculative Buy at GBX 160.40

• Over the past four years (H1 FY16 – H1 FY20), revenue and gross profit have surged at a CAGR of 8.23% and 52.94%, respectively.
• The gross margin has stayed above 57% over the past five years, which is significantly higher than the industry median of 31%.
• From the technical standpoint, shares were trading well above the short-term support level of 20-day (GBX 168.97), and 100-day (GBX 158.90) simple moving average prices, which reflects an uptrend in the stock.

Risk Assessments

• Covid-19 pandemic poses a risk to the supply chain and operating cost and could even interrupt the business with low demand.
• 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.

Recent News:

27 August 2020: The Company announced the disposal of The Sofa Workshop Limited (a wholly-owned subsidiary) to Halo Furnishings Limited for the total consideration of £0.3 million payable in cash on completion.

Trading Update (as on 25 August 2020)

• The trading remained strong in both online and in showrooms while order intake grew year-on-year over the last six weeks and stood nearly 70 million of revenues.
• The strong trading is supported by rising consumer demand and their spending on homes.
• It is further supported by the hybrid digital and physical retail offerings of the Company.

One Year Share Price Chart

1-Year Chart as of 22 September 2020, before the market close (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: EV/Sales Approach (NTM) (Illustrative)

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. Given the unprecedented level of uncertainties caused by Brexit and Covid-19, the short-term outlook remains uncertain. However, the positive trading momentum shall increase earnings resilience and strengthen financial headroom. Overall, the Company is well-positioned to capitalise on opportunities as the markets recover. Stock 52 week High and Low were GBX 302.00 and GBX 101.80, respectively.

Based on the factors discussed above, we have given a “Speculative Buy” recommendation on DFS Furniture PLC at the current market price of GBX 160.40 (as on 22 September 2020, before the market close at 8.16 AM GMT+1) with lower double-digit upside potential based 1.26x EV/Sales (approx.) on FY20E Sales (approx.). 

*All forecasted figures and Industry Information have been taken from Refinitiv, Thomson Reuters.

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