Peel Hunt says Dunelm set for recovery, ups to 'buy'

3rd Dec 2018 15:09

(Sharecast News) - Homeware retailer Dunelm surged on Monday as Peel Hunt upped the stock to 'buy' from 'hold' and lifted the price target to 750p from 550p, citing catalysts for a recovery next year as the company sharpens up its act following a series of downgrades driven largely by the 2016 Worldstores acquisition.Notwithstanding Brexit, the brokerage said it sees clear catalysts for recovery in 2019 from a renewed focus on the core offer, improved brand awareness and an accelerating online performance "as Dunelm fulfils its multi-channel potential"."Shareholder returns will also benefit from the potential return of special dividends from next year," it said.Peel argued that Dunelm is built on strong foundations. It pointed out that it's a UK market leader with a 5% rent-to-sales ratio and noted that it has 10% EBIT margins, 15% return on capital employed and one of the lowest levels of operational gearing in the sector."The distraction of the Worldstores acquisition and integration process had negatively impacted the performance of the core business. Since late summer, the core Dunelm proposition has visibly sharpened up, noting a step-up in trading performance in Q1 against very tough comparatives."With conservative trading assumptions built into market expectations, sales numbers look more than achievable if Dunelm can maintain current momentum."At 1505 GMT, the shares were up 16% to 626.50p.