Interactive Investor

Insider: have bosses at these two companies bagged a bargain?

Company directors are busy again snapping up shares in businesses that have suffered sharp declines in value. One of these firms has just sunk to a new low and the other isn’t far off.

25th September 2023 08:01

by Graeme Evans from interactive investor

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Five directors of DFS Furniture (LSE:DFS) have spent £150,000 backing the market leader to emerge from the industry downturn with its profit growth ambitions intact.

The share purchases by the company’s chair, finance boss and three non-executive directors followed the sofa chain’s annual results, when it highlighted a “clear route” to lifting its 2.8% profit margin to 5% even without an upturn in market conditions.

The longer-term aim when big ticket spending picks up is for DFS to deliver £1.4 billion of revenues at an 8% margin. Investors liked the reassuring results-day message as shares finished the week at 111.2p after a rebound of 6% in Thursday’s session.

The FTSE All-Share company, which boasts a 38% share of the UK upholstery market, described the current climate as one of the toughest it had experienced as it reported a 5% drop in revenues to £1.1 billion and 45% slide in earnings per share to 9.6p.

Industry volumes have fallen 15% on pre-pandemic levels and are forecast to dip another 5%, although DFS still expects low single-digit growth in underlying profits from this year’s £30.6 million.

Alongside margin improvement and annual cost savings of £50 million by 2026, the company is targeting growth opportunities in the £5 billion bed, mattresses and Home category.

The group completed a £250 million refinancing earlier this month, and believes that a solid base for long-term cash generation can deliver attractive returns to shareholders once the trading environment stabilises.

It is due to pay a dividend of 3p a share on 29 December, down from 3.7p the year before but in line with guidance given at March’s interim results.

The poor market conditions mean shares are down by a quarter this year, but broker Peel Hunt reckons management is doing everything right in the current conditions.

The City firm said: “It is clear that shares are paying too much attention to the current consumer malaise and not enough to the long-term potential, which is vast. The shares deserve a higher rating, much higher, in our view.”

Peel Hunt has a target price of 200p, while Stifel sees a 30% upside to its target price of 140p. Jefferies, which sits at 175p, said DFS had executed strongly on the levers and initiatives under its control, such as store refurbishments and customer experience.

It also highlighted the contribution of new finance director John Fallon, whose efficiency programme has underpinned the 5% margin target and potential 70% upside for profits.

Fallon bought £80,000 worth of DFS shares on Thursday, while chair Steve Johnson spent £20,000. The other buyers were Loraine Martins and two directors who have served on the board since 2018, senior independent director Alison Hutchinson and Jo Boydell.

Betting that things will get better

The challenges at Naked Wines (LSE:WINE) run much deeper, although two of its directors are optimistic of a brighter future after buying shares in the AIM-listed wine subscription firm.

The spending by chief executive Nick Devlin and new non-executive director Jack Pailing took place after shares fell sharply in the wake of the company’s delayed April year results.

Naked reported a worse-than-expected start to the new financial year and warned of material going concern uncertainty in the event it experiences a more severe downturn.

It is facing a perfect storm of high inflation, higher taxes on alcohol and falling disposable incomes, with revenues forecast to be down by 8-12% this year.

Former CEO Rowan Gormley, who founded Naked Wines 15 years ago and rejoined the board as chairman nine weeks ago, believes the problems are fixable.

He said that management had a clear plan for tackling costs and inventory commitments and were now in a position to get sales growing again.

Gormley added: “If we can't improve our new customer acquisition economics, then we still expect to have a profitable, cash generative business, albeit smaller than the one we have today.”

Analysts at Jefferies cut their earnings forecast but still have a “buy” recommendation based on a price target of 125p. They noted £50 million of liquidity in 2023 results and said the group has successfully renegotiated banking covenants.

Devlin, who bought £20,000 shares at 65p, said last week: “A leaner and more focussed Naked will be best placed to deliver for our customers and winemakers. I believe we can emerge from these challenges as a stronger business.”

Pailing spent £4,000 on shares and the London-based investment firm where he is portfolio manager picked up a £54,000 stake at prices between 60p and 65p. The stock closed the week at 58.2p, down from 139p at the start of the year.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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