Broker Liberum recently highlighted that the market may be undervaluing Frasers Group PLC (LSE:FRAS), the retail giant behind Sports Direct.
Liberum suggested that despite the complexity created by conservative accounting practices and mergers and acquisitions (M&A), Frasers' real financial health is strong.
Its 'clean' profit before tax (PBT) was over 100% higher annually from financial year 2020 to 2022, compared to the company's own 'adjusted' measure, analysts at Liberum.
The research underscored Frasers' robust cash generation, explaining how approximately £2 billion from operations has been reinvested to support its elevation strategy, finance M&A, and create more growth opportunities than ever before.
In a broker note, the Liberum number crunchers also noted Frasers' number one position in the UK sporting goods sector, which has driven an ambitious strategy.
This has led to a top-tier luxury offering in the UK, and an expansion into the mid-market sector, all backed by a leading automated distribution platform.
Liberum's analysts identified key value drivers such as the group's successful retail franchise, substantial cash generation, and prudent capital allocation decisions.
These elements contribute to a "virtuous circle", leading to Liberum's forecast of an earnings per share compound annual growth rate (CAGR) of 8.7% from financial year 2022 to 2025. The broker suggests potential further growth could arise from resilient core markets, operating leverage, and additional strategic M&A.
In its 43-page market missive, the broker's abacus rattlers contended that the market may have missed significant improvements in Frasers' governance and pointed out a sizeable free float of around £1 billion.
It further stressed that the retailer's "clean" profits are substantially higher than those reported and its cash generation is exceptional. Frasers' balance sheet is also described as very high quality.
In terms of value, Liberum remarks on Frasers' significant discount compared to its peers.
With a price-to-book ratio of 1.8 times (a 65% discount to peers), price-to-earnings ratio of 8.7 times (a 37% discount), enterprise value-to-EBITDA ratio of 4.8 times (a 34% discount), and a free cash flow yield of 6.5% (expected to rise to 8.2% in calendar year 2024), Liberum sees Frasers as a top-quality and undervalued retail player.
Its price target for the stock is £10 - a 50% premium to the current price of £6.75. The consensus price target is £8,21.