Dunelm's shares rise as Numis upgrades rating to 'buy'

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.”

Shares rose 4.45% to 644.98p at 1118 GMT.