Broker tips: Dunelm, Sage, Greene King

Dunelm Group’s shares advanced on Friday as Numis upgraded the stock to ‘buy’ from ‘add’ and reiterated a target price of 825p.

The homewares chain on Wednesday reported a 26% fall in pre-tax profit to £55.9m in the first half, blaming a weaker market and a temporary disruption to supply following its recent acquisition of Worldstores. Margins were also hurt by a weaker pound following the Brexit vote last June.

Like-for-like sales dropped 1.6% during the 26 weeks to 31 December and the company said market conditions remained “challenging”, particularly in homewares.

“Despite the tougher current backdrop for Homewares, which is likely to result in limited near-term growth in core Dunelm, with the shares now trading on a sector multiple (11.5x FY18 PE) we see value, given the quality of Dunelm's core operation alongside the growth opportunity afforded by the integration of Worldstores' capabilities,” Numis said.

Numis said the first half pre-tax profit was “largely consistent” with its estimate. The broker also highlighted Dunelm’s growth initiatives, including strong online progress, three new in-London stores, three new store refits trading strongly, development of the furniture offer, substantial supply chain and logistics upgrades, and investment in new ranges.

“While these measures are difficult to quantify individually, management is confident that, in aggregate, they will be sufficient to support the business' medium-term target of growing sales by 50%,” Numis said.

“Providing some support, the business continues to take market share, despite the impact of supply chain disruption on trading.”

Exane BNP Paribas has upgraded software group Sage to ‘outperform’ from ‘neutral’ and lifted price target to 750p from 640p.

The bank noted that Sage has de-rated on uninspiring top-line trends, including a slight hiccup in the first quarter of 2017, and perhaps the lower attraction of defensive cash return stories.

The stock has been the worst performer in European software on both a three- and 12-month view, despite strong earnings per share upgrades, and is now trading at an EV/EBITA calendar 2017 earnings of 13.8x, or a 16% discount to peers.

Exane said the recent issues such as those in France can be fixed, which should get Sage back to its targeted organic growth of more than 6% as soon as the second quarter.

“Moreover, recent go-to-market investments should produce benefits in the coming years. Sage has launched a £100m cost-cutting programme. The savings will be reinvested in the business in the short-term, meaning margin progression should remain limited in FY17.

“Longer-term, however, some of the savings (we estimate 1/3) should flow back at the EBIT level. We forecast a 200 basis points margin expansion from FY17e (27%) to FY19e (29%).”

Greene King’s shares fell on Friday as Canaccord Genuity reiterated a ‘buy’ rating but cut the target price to 850p from 900p and lowered its earnings guidance.

The pub operator reported strong trading over the Christmas period on Friday as it sounded a confident note on its outlook.

In the 40 weeks to 5 February, like-for-like sales grew 1.1%. Excluding Fayre & Square, LFL sales were up 1.6% over the period.

Over the last 16 weeks, the company said it had seen strong Christmas trading, alongside the usual quieter months of November and January.

In the three weeks over Christmas, LFL sales were up 4.5%, despite tough comparisons with the previous Christmas, with sales driven by particularly strong growth in London. Greene King said it broke its record for Christmas Day again, with sales up 6% on the previous year to £7.4m.

Greene King said it made further progress on the Spirit integration, with over 1,000 pubs now converted to the 'best of both' Pub Company IT system and ongoing synergy savings realised.

“It's disruptive and hard work to stitch two big companies together but investors should not lose sight of the goal that Greene King is after,” Canaccord said.

“Greene King and Spirit together is a much better investment proposition with higher quality earnings, stronger FCF and better growth prospects than before.”

Canaccord said it remains positive on the Spirit integration where synergies continue to come through. The broker expects synergies of £30m this year, which puts the company on track to achieve the original three-year target in two years.

Canaccord downgraded its estimates for earnings per share in fiscal year 2017 by 1.8% to 70.4p. It also reduced its forecasts for 2018 and 2019 by 3.7% and 4.2% respectively.