Dunelm deserves a premium valuation despite Christmas 'blip', says Shore Capital

(Sharecast News) - Shore Capital has reiterated a 'buy' rating on Dunelm, shrugging off recent investors concerns about a weak trading performance by the homeware retailer over Christmas, and highlighting a pick-up in momentum since over the fiscal third quarter. The broker said it has "increased confidence" in its full-year forecasts after the company's interim results last week.

"The most encouraging update which came out of Dunelm's interim results was the news that sales growth in January had improved to c.3-4% following the slower 1.6% growth seen in the second quarter, suggesting the weaker Christmas was more of a blip than the start of a downward trend," Shore Capital said.

Meanwhile, comments about lower cost inflation in the second half should reassure investors that the company's adjusted pre-tax profit guidance of £214m for the 12 months to 27 June, representing 1.4% growth over last year, is achievable despite 1 7.5% drop in profits in the first half.

"With weaker-than-expected Christmas sales and notable cost inflation, Dunelm's January trading update caused concern for investors and led to (in our view) an overreaction in the share price, the broker added.

Meanwhile, Shore Capital sees further opportunities for Dunelm to grow in the medium term, pointing out at the company has just a 7.9% share in a "highly fragmented" home and furniture market. It highlighted the success of Dunelm's smaller format stores, which could allow for continued space expansion and further market share gains.

The broker believes the company deserves a premium rating to the wider sector, but currently trades at a price-to-earnings ratio of just 12 after recent weakness.

Shore Capital has a fair value estimate for the stock of 1,175p, suggesting around 20% upside to the current price, which was up 0.2% at 975p by 1157 GMT.