DFS Furniture PLC (LON: DFS) 

DFS Furniture PLC (LON: DFS) is an FTSE All-Share listed Company, which is the designer, manufacturer and retailer of sofas and other furniture products. Moreover, the Company’s operations are present in the United Kingdom, Spain, the Netherlands, and Ireland.

Recent trend of dividend payments

• No Dividend in FY20: The Company had not paid any dividend during FY20 to support the Group's financial resilience.
• Dividend resumed in FY21: Nevertheless, DFS will pay a final dividend of 50 pence per share attributable for FY21 on 23 December 2021, while the ex-dividend date was 25 November 2021.
• Decent Payout Ratio: DFS normally pays dividends at a payout ratio between 40% and 50% of annual underlying cash generation.
  

Growth Prospects

• Strong Online Business: The increased investments in digital capabilities had enabled DFS to show around 184.30% year-on-year jump in online revenue during FY21.
• Integration of Dwell: The successful integration of Dwell had raised efficiency and created a competitive fulfilment solution for DFS's extended homeware offer.
• Positive Industry Dynamics: The Company had launched 15 upholstered bed ranges within the DFS brand and reinforced the beds commercial partnerships. Furthermore, DFS had the untapped potential to penetrate over £5 billion of bed and non-upholstery living room market.
• Opening of New Sofology Showrooms: DFS had opened five new Sofology Showrooms in FY21, with eight openings planned in FY22.

Key Risks

• Decline in UK Retail Sales: With reference to the recently available data from the Office for National Statistics, UK retail sales demonstrated a monthly decline of around 0.2% during September 2021, the fifth consecutive monthly drop in a row.
• Supply Chain Disruption: The recent shortage of lorry drivers in the UK had created supply chain disruptions and escalated the freight cost.
• Wrong Strategic Choices: The failure of partner relationships could adversely impact the business in the near term.
• Expected Increasing Interest Rates: The recent hawkish comments made by several central governments regarding a hike in the interest rates could make fundraising difficult for the Company.

Now, we will analyse the Key Fundamental Statistics & Shareholding Pattern of DFS Furniture PLC.  

Aviva Investors Global Services Limited [Activist] is the most significant shareholder as it holds nearly 19.90 million shares as of 30 September 2021. 

FY21 Financial & Operational Highlights (for 52 weeks ended 27 June 2021, as of 23 September 2021)

(Source: Company result)

• Strong Top-Line Business: The Group’s revenue grew by around 47.4% from £724.5 million during FY20 to £1,067.70 million for FY21. However, the FY20 revenues were adversely impacted by the pause in deliveries for most of the final quarter to comply with Covid-19 restrictions.
• Turnaround into Profitability: DFS had witnessed a positive turnaround in profitability and reported profit before tax of around £99.20 million for FY21.
• Strengthening of Balance Sheet: DFS had shown a significant reduction of almost 88.8% in net bank debt from £157.7 million at previous financial year-end to £19.0 million at the end of FY21.

Financial Ratios (FY21)

Share Price Performance Analysis

 (Source: Refinitiv, Research done by Kalkine Group)

On 25 October 2021, at 08:50 AM GMT+1, DFS’s shares were trading at GBX 270.00, down by around 1.10% from the previous day closing price. Stock 52-week High and Low were 318.50 and GBX 191.65, respectively.

From a technical perspective, the stock price is hovering above the 20-days exponential moving average of GBX 267.70, indicating an upside potential in the stock price. Moreover, the MACD line remained above the signal line, reflecting an upside momentum in the stock price.

On a year-to-date basis, DFS’s stock price has delivered a positive return of ~22.73%, and it has outperformed the FTSE All-Share index (benchmark index) with a return of approximately 12.22%, but slightly underperformed against the FTSE All-Share Retailers index (benchmark sector) with a return of about 23.23%.

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

Business Outlook

DFS had managed to gain significant market share during FY21, supported by the resilient business model and ability to attract customers through digital and physical retail channels at scale. Moreover, the strong customer demand observed during the final quarter of FY21 would benefit revenues and profits in the first half of FY22. The Company aimed to achieve operational excellence by increasing warehouse capacity and resourcing levels to meet customer demand.

However, the Company remained cautious of logistics disruption, cost inflation pressures and unplanned Covid absences. In addition, the stock price may undergo adverse volatile movements amid rising inflation rates worldwide and increasing bond yields. In a nutshell, DFS remained confident to drive shareholder returns benefitted by resilient business model, and lucrative business partnerships.

Considering the solid industry dynamics, strong top-line business growth, a significant reduction in net debt, positive turnaround into profitability, resumption of dividend payments, and support from the valuation as done using the above method, we have given a “BUY” recommendation on DFS Furniture PLC at the current price of GBX 270.00 (as on 25 October 2021 at 08:50 AM GMT+1), with lower-double digit upside potential based on 12.62x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.).

*The reference data in this report has been partly sourced from REFINITIV.

*All forecasted figures and Peer information have been taken from REFINITIV.

*Dividend Yield may vary as per the stock price movement.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

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