Dunelm Group PLC

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

Investment Rationale: Buy at GBX 979.50

• Operational Achievements: During Q3 FY21, Dunelm launched new products in collaboration with the Natural History Museum, ramped up its capacity, gained further market share, and opened a new superstore in Leeds. Therefore, FY22 profit before tax is likely to be in line with the market expectations.
• Financial Growth: In H1 FY22, Dunelm reported an improvement in sales, gross margin, profit before tax, free cash flow, and subsequently, there was a 16.7% hike in the interim dividend per share.
• Growth Catalysts: Dunelm demonstrated continued outperformance of the market in both homewares and furniture in FY22 so far. Moreover, it continued investment in digital capabilities to improve customer proposition.
• Technical Indicator: From a technical standpoint, the current stock price is hovering around the lower Bollinger Band, while the 14-day RSI (~29.96) is also in the oversold position.
• Undervalued Multiples: On a forward 12-month basis, key valuation multiples (EV/Sales, EV/EBITDA, Price/Earnings, and Price/Cash Flow) are quite lower than the average of the Specialty Retailers industry.

Key Risks

• Gloomy Outlook: The prospect of higher interest rates and a high living cost can reduce demand and squeeze the profit margins of home builders.
• Macroeconomic Risk: The Russian invasion in Ukraine has already jolted the market, while the slow retail growth and battered consumer spending in the UK amid rising fuel costs can keep the equity market under pressure.

Q3 FY22 Trading Update (for the 13-week period ended 26 March 2022, as of 14 April 2022)

 (Source: Company Website)

• Sustained Growth: During Q3 FY22, sales grew 69% YoY to £399 million, and 40% higher than Q3 FY20.
• Financial Position: As of 26 March 2022, the Company had net debt of £14 million (Q3 FY21: net cash £40 million), following the payment of the £75 million special dividends.

Share Price Chart

 (Source: REFINITIV; Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY23) (Illustrative)

*Peers: Vivo Energy PLC, Victorian Plumbing Group PLC, Gear4music Holdings PLC, and ASOS PLC.

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

Conclusion

Dunelm looked confident in its long-term prospects and further market share gains, and it is well-placed to navigate short-term inflationary and macroeconomic challenges.

Based on the decent fundamentals, continued investment, and favorable valuation conducted above, we have given a “Buy” recommendation on Dunelm Group PLC at the closing market price of GBX 979.50 (as of 26 April 2022), with a lower-double digit upside potential based on 14.70x Price/NTM Earnings (approx.) on FY23E earnings per share (approx.).

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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