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Adairs upgrades profit guidance after strong sales in manchester and homewares

Strong cash generation and debt reduction could provide the company with capital management options in fiscal 2019.

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Pre-tax profit is forecast to be between $44 million and $46.5 million, up from previous mid-range guidance of $42 million

Adairs Ltd (ASX:ADH), a manchester and homewares retailer, provided an impressive trading update on Friday, resulting in shares rallying 15%.

The company had already delivered a strong first half result and robust sales momentum has continued over recent months, prompting an upgrade to its earnings guidance.

Adairs is now forecasting a pre-tax profit of between $44 million and $46.5 million, up from previous mid-range guidance of $42 million.

Strengthened balance sheet

Management also highlighted the group’s strong cash generation which has assisted the company in lowering its net debt position.

This is expected to be in a range between $12 million and $16 million at year-end, possibly providing options regarding capital management initiatives in fiscal 2019.

These could be in the form of extra dividends, special dividends or perhaps a share buy-back which would assist in driving earnings per share growth.

Poised to beat broker expectations

Morgans' analyst Josephine Little was already upbeat about the company’s prospects in February following its impressive first half result.

However, it was trading broadly in line with her price target of $2.28 at the time, and she reduced her ‘add’ recommendation to ‘hold’.

This compares with the consensus price target of $2.35.

Earnings per share forecasts could be upgraded

The fiscal 2018 consensus earnings per share forecast is 18 cents but after today’s earnings upgrades this could increase to about 19 cents.

Following today’s rerating, the company’s shares have settled around the $2.10 mark which implies a forward PE multiple of 11.2 based on earnings per share of 19 cents.

Analyst upgrades could provide share price momentum

The forward trading multiple appears conservative for a company forecast to deliver earnings per share growth of more than 40% in fiscal 2018, followed by 12% in fiscal 2019.

Today’s trading update may see a few analysts sharpening their pencils, perhaps resulting in changes in recommendations and share price targets early next week.

This could provide further share price momentum.

Quick facts: Adairs Ltd

Price: 3.89 AUD

ASX:ADH
Market: ASX
Market Cap: $657.71 m
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