Monday 1 July 2019 11:00 amInteractive Investor Talk

Carpetright shares: Undervalued or overexcited?

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By Graeme Evans from interactive investor.

Carpetright’s peak trading period straddles the next Brexit deadline, but speculators are not put off.

Carpetright (LSE:CPR) and its threadbare share price drew interest from speculative investors last week amid signs that the drastic measures needed for its survival are starting to pay off.

While early days in the turnaround, the floor covering retailer’s shares surged as much as 22% after reporting a return to underlying sales growth at the start of the new financial year.

The 8.5% improvement in UK sales was put into context though by the whopping £94.6 million of combined losses racked up across last week’s annual results and the previous year.

In its fight for survival, Carpetright hit the reset button last year when it became one of the first of the current crop of struggling retailers to undergo a company voluntary arrangement (CVA) process. This enabled the company to address unsustainable leases and restructure the UK store estate, including through the closure of 80 outlets.

The passing of the CVA by landlords and subsequent £65 million recapitalisation process means chief executive Wilf Walsh has now moved from survival talk to striking a more upbeat tone.

He said:

“This coming year will be about steering the business through an improvement in performance and laying the groundwork for longer term, sustainable earnings and cash generation.”

Walsh points out that Carpetright remains “comfortably the largest floorcovering retailer in the UK” with 334 stores. The majority of these outlets are already trading under a new brand format, with the aim to complete the rest and carry out additional investment by the end of the CVA period in April 2021.

While Walsh said this meant Carpetright was in a strong position from which to build a recovery, it’s clear that investors will need more convincing. After the initial jump in the price at the opening bell, shares were later trading 9% higher at below 20p.

Source: TradingView Past performance is not a guide to future performance

Analysts at Shore Capital think a forward price/earnings (PE) multiple of 13.7x is up with events, leading them to retain their 18p recommendation. Peel Hunt is more optimistic at 50p, but this has been lowered from the 70p seen prior to last week’s results.

The house broker is encouraged by last week’s trading performance and rising average transaction values, which offer some confidence in the “relevance of Carpetright’s offer to customers” and ability to deliver a profitable recovery.

However, Peel Hunt has still trimmed its forecasts due to Carpetright’s peak trading period in October and November straddling the next deadline for Brexit to take place. This has resulted in it softening its predicted UK sales decline for this year to 5% from 2%, with a resulting £5 million downgrade to group earnings to £17.1 million.

The Brexit influence on housing market and consumer confidence is frustrating for Carpetright, given how hard it has worked to rebuild trade after the CVA made customers nervous about leaving a deposit for a bespoke product that would not be delivered for a few weeks.

Walsh added:

“Flooring is a product that can be “left for another day” by customers, but importantly is one that is needed by every householder, suggesting significant latent demand when confidence returns.”

He also noted a shift in the approach of landlords, who are now prioritising security of income as the “property world realigns itself with the real world”. Walsh said: “Since the CVA, we have maintained several stores, previously earmarked for closure, on zero rent, as landlords would rather not have an empty store on their site or indeed pick up the rates bill of a departed tenant.”

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