ShoreCap, which has started its coverage of the retailer with a ‘buy’ recommendation, noted that DFS has a market leading 34% share of the furniture market and makes 22% of sales online.
“Given the exit of a number of competitors (including Harveys and a downsized Oak Furnitureland store portfolio), we believe it can leverage its scale and win further market share,” said analyst Greg Lawless in a note on Tuesday afternoon.
The group’s recent order intake book implies that revenues in the year to end-June 2021 will be significantly ahead of the preceding year, with the company recently noting that it had made GBP226mln of additional revenue so far.
Earnings will also be helped by a number of one-off benefits including the business rates holiday until the end of March 2021.
“Looking through the two-year earnings cycle, we believe that the shares are undervalued,” the analyst said, with a one-year forward P/E ratio of 6.4 times and an enterprise value of three times underlying profits.
“Our valuation analysis considers other higher-ticket consumer companies/retail specialists, to which DFS currently trades at a significant discount,” Lawless added, also highlight the double-digit free cash flow yield for the current year.
Shore Cap’s share price target is 330p, representing plenty of upside potential to the last closing price of 201.5p.