Stockwatch: this FTSE 100 share’s 4-year bull run can continue
Analyst Edmond Jackson looks at the performance of a previous tip and assesses latest results and market reaction. The outcome is favourable.
19th July 2024 11:22
by Edmond Jackson from interactive investor
Share on
![Golden stock market bull 600](https://media-prod.ii.co.uk/s3fs-public/2024-07/bull600.jpg)
It is a rather volatile ride but yesterday FTSE 100-listed sports and clothing retailer Frasers Group (LSE:FRAS) leapt 9% to over 900p in reaction to its annual results, as if the market had been missing a trick.
- Invest with ii: What is a Managed ISA? | Open a Managed ISA | Transfer an ISA
This stock has traded in a bull market since its spring 2020 drop below 200p in response to Covid. From 2022, the trend lost upwards momentum and became more volatile, but is still up overall. Price has eased to 880p with the market this morning, but does the manner of reception to its results imply the trend is intact, or is it just investors looking for catch-up plays following wider optimism manifesting since April?
![Frasers Group chart](https://media-prod.ii.co.uk/s3fs-public/2024-07/FRAS_2024-07-19_10-55-04.png)
Source: TradingView. Past performance is not a guide to future performance.
Fair value adjustments aid 13% growth claim
Frasers highlights fair value adjustmentsat the pre-tax profit level, against which the trailing price/earnings (PE) multiple is a modest 9.2x if you follow the methodology through to adjusted earnings per share of 95.8p (versus 86.8p reported).
You can spot the adjustments early in the results for the year ended to 28 April; in particular, a £41 million negative entry last year for fair value losses/gains on disposal of equity derivatives becoming a £69 million gain – a £110 million swing when adjusted pre-tax profit has risen by £64 million.
These “equity derivatives” relate to share dealing by founder and 73% shareholder, Mike Ashley, which has led to stakes in various problem businesses. It would be interesting to figure what value has been created or destroyed over the years with this maverick activity – which has likely contributed to a rather volatile underlying financial trend.
- Sign up to our free newsletter for share, fund and trust ideas, and the latest news and analysis
- UK bank results season: a preview and top stock picks
I would also not deduct £23 million share-based payments when deriving normalised profit – they are a genuine cost – although I agree, this helps “see through” to underlying business performance.
No dividend also helps explain modest rating
Instead of dividends there were £126 million of share buybacks in the last financial year, amid a 26% hike in net cash inflow from operations to £682 million. Working capital movements do however explain this jump, and the approach to “returns” may be explained by Ashley effectively controlling the board and not wanting to raise his income tax bill.
His son-in-law CEO has a vigorous narrative and, in fairness, while “luxury” brands elsewhere are under the spending cosh from consumers, Frasers’ “premium lifestyle” side saw only a 1% revenue slip in the last financial year – as if relative out-performance.
Partly due to the historical legacy of Ashley building up the group, and the CEO’s property background in a relatively brief career (he was appointed to run this business in 2022 aged 32), its balance sheet has a strong aspect of fixed assets – with intangibles just 2% of £1,873 million fixed assets or 415p a share.
Net financial debt of £448 million is relatively modest (additionally there are £646 million leases) giving rise to only a £48 million net interest charge against £521 million reported operating profit. So the balance sheet is strong overall, and its financial risk quite low.
Frasers Group - financial summary
year-end 28 April
2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | 2024 | |
Turnover (£ million) | 2,904 | 3,245 | 3,360 | 3,702 | 3,957 | 3,507 | 4,691 | 5,557 | 5,538 |
Operating margin (%) | 7.7 | 4.6 | 6.0 | 4.3 | 4.9 | -2.1 | 6.4 | 9.9 | 9.9 |
Operating profit (£m) | 223 | 148 | 201 | 161 | 192 | -73.3 | 301 | 535 | 521 |
Net profit (£m) | 277 | 230 | 20.1 | 112 | 93.8 | -83.0 | 250 | 488 | 387 |
EPS - reported (p) | 45.5 | 38.3 | 3.8 | 21.5 | 18.5 | -18.2 | 47.5 | 100 | 90 |
EPS - normalised (p) | 51.9 | 31.4 | 2.4 | 25.6 | 27.9 | 18.2 | 78.4 | 101 | 88 |
Operating cashflow/share (p) | 10.8 | 42.9 | 61.4 | 52.5 | 74.3 | 103 | 108 | 118 | 156 |
Capital expenditure/share (p) | 33.9 | 68.9 | 39.2 | 30.6 | 63.8 | 43.9 | 68.5 | 102 | 60.9 |
Free cashflow/share (p) | -23.1 | -26.0 | 22.2 | 21.9 | 10.5 | 59.1 | 39.5 | 15.7 | 94.6 |
Return on total capital (%) | 12.3 | 8.5 | 9.2 | 6.3 | 6.4 | -2.6 | 9.7 | 16.7 | 15.6 |
Cash (£m) | 234 | 205 | 360 | 448 | 534 | 457 | 337 | 333 | 359 |
Net debt (£m) | 99.7 | 182 | 397 | 379 | 990 | 972 | 1,112 | 1,097 | 1,094 |
Net assets (£m) | 1,386 | 1,223 | 1,194 | 1,247 | 1,267 | 1,193 | 1,287 | 1,668 | 1,873 |
Net assets per share (p) | 232 | 218 | 222 | 232 | 224 | 230 | 263 | 346 | 415 |
Source: historic company REFS and company accounts.
Mixed aspects to group revenue profile
The CEO asserts: “Sports Direct continues to reinforce its position as an undisputed leader in sport. The sport industry is not slowing down; high consumer demand, coupled with our unique proposition continues to drive profitable growth.”
But within annual group revenue 1% softer at £5,538 million, UK sports retail revenue is down over 3% to £2,861 million, significantly offset by international revenue up similarly to £1,289 million.
I do not pour cold water on the CEO’s remark; spending on sports kit was a key reason I set out a “buy” case for Frasers at 700p in June 2022. When interest rates come down and if this Labour government delivers on what it says – about working people becoming better off through economic growth – then on a two-year view Frasers’ UK sports revenue should improve.
- Mining sector dividend forecasts: summer 2024
- Sector Screener: two consumer stocks tipped to extend rally
But I prefer to see exactly what Frasers means by “a strong trading performance from the core Sports Direct business...which offset the majority of the planned sales declines in Game UK and Studio Retail, also effect of House of Fraser store closures.” (These were all problem businesses introduced by Ashley’s share dealing which led to takeovers.)
The “segmental analysis” within Frasers’ accounts lumps together Sports Direct’s numbers with these other businesses lagging, hence a perception of the crown jewels is blurred.
Meanwhile, the premium lifestyle side edged up over 1% to £1,204 million, property income doubled to near £73 million and financial services - where management sees great potential - rose 11% to £111 million.
23% fall in reported net profit looks in line with consensus
Due to myriad adjustments within Frasers’ presentation of profit, and scope for analysts to take individual views, it is quite a miracle that profit matches the consensus view – £387 million was the same as published consensus I saw early yesterday. Yet this could have been on an adjusted basis.
Adding back depreciation and impairments, but deducting share-based payments and foreign exchange gains (unlike the company’s presentation) I derive an adjusted group operating profit of £798 million – down 7% on £858 million to April 2023.
This still implies a strong 14.4% operating margin despite a slip from 15.4%, which should be respected. It is partly why, at near 900p, the stock’s risk/reward profile is overall attractive and rates at least a “hold”.
Management looks to have its act together for a consumer environment that ought to improve in years ahead. Moreover, we are in a “summer of sport” with the Olympics next after European football, which ought to be a trigger for social sports activity.
Brand partnering is competitive advantage
Frasers says brand partnering “gives us better access to product across the group”, which I would affirm when I took up tennis again a couple of years ago (not knowing for how long enthusiasm might last).
A good-quality Slazenger polo shirt, tennis shorts, three pairs of socks and a couple of sweat bands cost me very little. It shows how Frasers is adept at market positioning with killer prices.
Management contends its “elevation strategy” – focusing on store experience and digital product, with three core pillars of sports, premium and luxury – is a differentiator. New brands sold such as The North Face, On and Columbia, have contributed to a strong trading performance.
- Proof that professional investors are shifting cash to UK shares
- Should you own company behind biggest bank profit ever?
Meanwhile, near-completion of a warehouse automation project has aided an 8% reduction in stock-holding year-on-year; and a new group-wide digital platform has streamlined and enhanced retail operations.
They are bullish about “Frasers Plus”, a new revenue stream targeted with over £1 billion annual sales and helped by a strategic partnership with e-commerce group THG plc. The CEO asserts “a break-out year for building Frasers’ future growth, benefits of recent investment to be seen from this financial year...significant synergies from both our automation programme and the integration of acquisitions.”
Overcoming perception of maverick development
If Frasers can steadily shake off this problem with a maverick owner, its bull trend looks intact. Some investors will say you never quite know what Mike Ashley could deal next, and how independent is his son-in-law CEO?
It is therefore a mixed rationale on this stock, but I am happy to take a “buy” stance again given the consumer environment looks set to steadily improve and management is adept with marketing and cost control.
Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.
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.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.
Disclosure
We use a combination of fundamental and technical analysis in forming our view as to the valuation and prospects of an investment. Where relevant we have set out those particular matters we think are important in the above article, but further detail can be found here.
Please note that our article on this investment should not be considered to be a regular publication.
Details of all recommendations issued by ii during the previous 12-month period can be found here.
ii adheres to a strict code of conduct. Contributors may hold shares or have other interests in companies included in these portfolios, which could create a conflict of interests. Contributors intending to write about any financial instruments in which they have an interest are required to disclose such interest to ii and in the article itself. ii will at all times consider whether such interest impairs the objectivity of the recommendation.
In addition, individuals involved in the production of investment articles are subject to a personal account dealing restriction, which prevents them from placing a transaction in the specified instrument(s) for a period before and for five working days after such publication. This is to avoid personal interests conflicting with the interests of the recipients of those investment articles.