“The share price has risen 84% since its last 12-month lows in December and we believe the market is now fairly pricing in Dunelm's medium-term growth opportunity,” UBS said.
The investment bank cut its rating on the stock to ‘neutral’ from ‘buy’ but raised its target price to 920p from 810p.
UBS said it continues to believe the business has a high-quality growth outlook underpinned by capacity exits, multi-channel enhancements and retail execution.
“However, following a c70% rerating year-to-date in the price-earnings ratio to 18x, we see limited upside to market expectations for medium-term like-for-like (LFL) growth of +4.9% compound annual growth rate to the fiscal year 2023 (vs. UBS estimate +5.2%).”
On Wednesday, Dunelm expects full-year pre-tax profit to be slightly ahead of analysts’ estimates of between £115.6-118.5mln this year after a strong third quarter.
Like-for-like sales climbed 12.5% in the third quarter with online sales up 32.1% and store sales up 9.8%.
Improved sourcing and the “positive impact” of closing the Worldstores businesses helped boost margins by 90 basis points, and that figure is expected to continue to rise throughout the final quarter.
However, Dunelm warned that political and economic uncertainty “remains heightened” as it enters the final quarter.
“With a strong FY19 coming to a close for Dunelm and with an easy LFL comp in 4Q19 of -0.1%, we look ahead to the key drivers for FY20. Top-line momentum looks well supported by 1) circa £1bn of potential capacity exits; 2) the launch of click & collect and a new website in the summer; and 3) continued customer growth from successful advertising,” UBS said.
“We also see scope for circa 20bps of EBIT margin expansion (but this could be tempered by the transition to the new web platform).
“Taken together we expect strong cash generation in FY20 (second consecutive year of more than £100mln free cash flow), resulting in special distributions of circa £100mln in FY21 (equivalent to 50p/share).”
In morning trading, shares in Dunelm were flat at 886.5p.