Interactive Investor

Expect record year for DFS Furniture

23rd July 2015 09:21

Harriet Mann from interactive investor

Tough comparatives and one less week of trading slowed sales momentum at DFS in the second-half, but the sofa seller promises record underlying full-year results in October, matching market expectations. That means it will swing into profit and can start paying dividends, news which has received a clear thumbs-up from investors.

Sales for the financial year ending 1 August are up 7% so far. Sofa Workshop and Dwell, both bought before the company floated for a second time in March at 255p, chipped in, although their share of profit is limited due to their scale and stage of turnaround.

In line with guidance, broker Numis expects annual sales to jump 7% to £704 million, which will drive pre-tax profit from nothing last year to £57.4 million. This puts 2015 earnings per share estimates at 20.5p with a 2.3% dividend yield. Wednesday's 9% rally to 290p had unwound slightly by the end of the day, with the shares up 6% at 282p. This puts them on 13.8 times earnings.

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Management predict net debt of less than two times underlying cash profit, as the group continues to generate "robust" free cash flow. This means they will announce their first dividend as a public company in October.

Further out, DFS is relying on store expansion, a multi-channel sales approach - stores, online, mobile etc - and product development to fuel growth. And although the group does face challenges, growth in disposable income and consumer confidence should help the group improve its sales and market share next financial year. Its foray into the Dutch market went well and the firm plans to open two more stores there this year, which should boost revenue by £2-£3 million.

"Overall the business enjoys excellent prospects to deliver long-term profitable growth, strong cash generation and a progressive dividend policy as one of the UK's best-known brands, a major British manufacturer and the country's leading retailer of upholstered furniture," the company said Wednesday.

Listing in a flurry of UK IPOs, DFS joined the market with furniture peer ScS, but while DFS is up around 10%, ScS has crashed by around 30% (see below).

DFS shares have traded largely between the IPO price and 290p since their March flotation - save their brief 300p kiss last month. "The shares have tracked the sector since the IPO but the PE discount to cal-16F has widened to 30%," points out Numis analyst Matthew Taylor. "We continue to view a 17.5% discount as appropriate, leading us to upgrade our target price to 315p and our recommendation to Add."

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