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Dunelm shares dragged lower by Peel Hunt downgrade ahead of quarterly trading update

Peel Hunt cut its rating on Dunelm to ‘add’ from ‘buy’ but raised its target price to 1,000p from 800p
Dunelm
Peel Hunt sees potential for the return of a special dividend

Dunelm Group PLC (LON:DNLM) shares were under pressure on Friday after Peel Hunt downgraded its recommendation on the homewares retailer ahead of next week’s third-quarter trading update.

Peel Hunt cut its rating to ‘add’ from ‘buy’ but raised its target price to 1,000p from 800p, noting that Dunelm’s shares have risen sharply since it upgraded the stock in December.

READ: Dunelm stockpiles ahead of Brexit but shares jump on improved interims and dividend hike

“Our enthusiasm for Dunelm remains unchanged, we see significant upside over the next 2-3 years as management unlocks the benefit of a much more aligned, omni channel offering,” the broker said.

“We can also see Dunelm taking market share from the shrinking department store sector and the generalists.

“However, the shares have risen 60% since we upgraded to ‘buy’ in December and now trade on 2020 price-earnings ratio of circa 18 x, a well-deserved structural growth multiple.”

Improved online offering and product ranges boost Dunelm trading and shares 

Dunelm’s trading and share price outperformance has so far been driven by the company’s strategy to focus on an improved core offering and more compelling shopping experience, Peel Hunt said.

Peel Hunt sees the potential for an improved multi-channel offering, click and collect, raised brand awareness and the potential for margins to pick up from relative historical lows on expected cost leverage, to provide the “foundation for sustainable profit growth and cash generation over the next few years”.

The immediate upside is “more limited”, Peel Hunt said, although the broker can see Dunelm continuing to outperform over 2019 into the medium term.

Peel Hunt sees potential return of special dividend  

“With improved cash generation comes the potential return of the special dividend, most likely early in the next financial year,” it said.

On the back of a better multi-channel platform and increase in product ranges, Dunelm’s performance over the first half was much stronger than expected with a 3.8% rise in like-for-like store sales and online growth of 35.8%.

Dunelm said in the interims that its trading momentum had continued into the early part of the third quarter and it was confident of delivering market expectations for the full year for pre-tax profits of between £114mln-£118mln.

“We still don’t want to let our forecasts run away at this early stage, but our assumptions look too conservative, especially in light of the prior year heat wave effect in Q4 that creates a sharp drop off in the comparative,” Peel Hunt said.

In late morning trading, shares fell 1.2% to 890p. 

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