BUY: DFS Furniture (DFS)
The sofa retailer’s results were not inspiring, but the market has been overly harsh, writes Mitchell Labiak.
It’s difficult for investors to focus on a company’s results when it is simultaneously slashing future profit guidance. That is why DFS Furniture’s shares slumped 7 per cent on Tuesday, the day of its half-year results release. It wasn’t because the sofa retailer’s interim sales, earnings and profit sank (the market expected that due to guidance posted in January) but because its full-year profit guidance did.
The company said “weaker market demand” meant it now expected pre-tax profit for the year to the end of June to be around £20mn-£25mn, after having told the market as recently as January that it was still on target to hit £30mn-£35mn.
The reversal wasn’t well received, but at least DFS is prepping investors for further bad news, noting that its guidance drop “exclud[es] the potential risk of Red Sea delays which we continue to monitor closely”. Meanwhile, its sales guidance slid to £955mn-£980mn after lowering the guidance in January due to “record hot weather in September and early October”.
The question is how much of these trading issues are temporary, and to what extent it is reflected in the market valuation. After all, the business’s growth trajectory looks far from guaranteed, especially when unseasonably toasty early autumn sunshine can knock it off course. Hotter weather is something all companies should prepare for in a warming world, but the DFS supply chain appears vulnerable.
However, despite the occasional blip, DFS’s long-term revenue growth looks good. While past events are not an indicator of future performance, sales have grown steadily over the past decade, and the analyst consensus forecast is that sales will keep growing, notwithstanding the expected drop this year. The expectation is that this will give DFS scope to pay a 7.82p dividend per share for the year to June 2026.
That would still be far from pre-Covid, but the market has priced that into the shares and then some. Right now, DFS trades at around net asset value per share, which we feel undervalues the growth potential for this business. And should the consensus forecast earnings for the 12 months to 2026 prove correct at 20.4p per share, DFS currently trades at just five times that. In short, while investing in this stock involves a lot of assumptions around trading improvements (and interest rates), we believe the price is low enough to justify a speculative punt. As such, we maintain our rating.
HOLD: Trustpilot (TRST)
The stock continues its upward march amid growing user figures and a crackdown on fake reviews, writes Jennifer Johnson.
Just when you thought its shares couldn’t go higher, consumer review website Trustpilot swung to a profit in the year ending December 31. Adjusted Ebitda, the company’s preferred metric, came in ahead of the market’s expectations at $16mn (£12.6mn) — against a loss of $4mn in full year 2022.
Of course, the “adjusted” qualifier is doing some heavy lifting here, as it excludes the financial impact of depreciation, amortisation and share-based compensation. Were these factored in, Trustpilot would have made a small operating loss of around $600,000 — which nonetheless pales in comparison with its $16mn loss the previous year.
Put plainly, things are improving for the group. Part of this is down to the simple fact that more people are using the platform: its total cumulative reviews were up 25 per cent to 267mn in FY2023.
Meanwhile, cash inflow from operating activities was nearly $21mn, which is certainly better than 2022’s cash outflow of $2.7mn. According to management, the boost was “largely driven by revenue growth, improving operating leverage, and a higher bonus accrual within working capital”.
Trustpilot also claims to have made headway with spotting fake reviews on its platform (ie those paid for by businesses and written by third parties). The group said more than 3mn fraudulent posts were removed last year, with almost 80 per cent of them automatically eliminated by its fraud detection systems.
While fake reviews might be the company’s most significant reputational hurdle, its hefty valuation is perhaps the biggest barrier for would-be investors. The shares are up more than 50 per cent in the year to date, thanks in part to a new buyback programme. But with a consensus forward price/earnings ratio of more than 144 times for full-year 2024, we’re happy to wait on the sidelines a little longer.
SELL: Marshalls (MSLH)
The company is less confident about the path of a housing and construction market recovery, writes Christopher Akers.
This was a gloomy set of results from Marshalls, as suggested by a 10 per cent markdown of the shares. The building products business slashed its dividend by almost half as profits tumbled in the context of continuing challenges for housing market demand. It now thinks revenue this year will be lower than it had expected and that profits will be flat, after the top line went backwards in the first two months of the new year.
Investors knew that the figures weren’t going to be pretty after the annual revenue contraction was trailed in January. But the warning from new chief executive Matt Pullen that a forecast slight recovery in the second half is “expected to be slower and more modest than previously anticipated” has now added a big dose of uncertainty to the outlook.
There was evidence of demand damage across the business last year, from new-build housing to traditional roofing products operations. Revenues at the key landscaping division (which contributed almost half of total sales) and the building products division were down 18 per cent and 12 per cent, respectively, with operating profit falling by over 50 per cent at each.
Over at the Marley roofing products business, revenue rose 36 per cent to £180mn due to consolidation effects — the company bought roof tile maker Marley at an enterprise value of £535mn back in 2022 — but like-for-like revenue was still down by 9 per cent. We remain concerned about the prospect of impairment of the Marley goodwill given market conditions, with goodwill and intangible assets making up 50 per cent of Marshalls’ total assets.
The shares trade at 16 times forward consensus earnings, a level that means we remain bearish.
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