Frasers Group – Shares Feel Very Wrongly Priced

He certainly grabs the headlines.

Mike Ashley’s moves over the last few years has seen his Frasers Group (LON:FRAS) acquire a mass of retail and leading brand names.

His operations now employ over 30,000 people, with some 950 retail store in the UK, while operating in over 20 countries.

Founder Mike Ashley opened up his first sports and ski shop in Maidenhead in 1982. By the late 1990s, he had opened 100 stores across the UK, rebranding the chain as Sports Soccer and acquiring some major brands including Donnay.

By 2008 it was trading under the name Sports Direct and had become a high street staple.

As it grew it became more than just a sports retailer, rebranding as Frasers Group in 2019.

It now has three established core pillars: Sports, Premium and Luxury.

His range away from his major sports retail areas covers Savile Row tailors, cycle shops, gyms, sports equipment, sofas, etc etc.

His recent forays in the markets have seen his group acquire and build up significant stakes in AO World, Currys, THG, Boohoo, Mulberry, ASOS, N Brown and Hugo Boss.

However the £3.6bn FTSE 100 group, which is run by Ashley’s son-in-law Michael Murray, reported an excellent set of results yesterday for the year to end April this year.

Revenue rose by almost 16% to £5.57bn for the 12-month period, adjusted pre-tax profit came in at £478.1m which was up from £339.8m last year.

Management Comment

CEO Michael Murray stated that: 

“In my first full year as Chief Executive, we have delivered a strong performance across the Group. We were bold in setting our full year guidance twelve months ago, before the full impact of the cost-of-living crisis was clear, but our business has remained resilient, and we have met these expectations. 

The Elevation Strategy is continuing to drive results across every segment, and I want to thank the entire company for all their hard work in delivering our vision for Frasers Group. It has been a particularly significant year for Sports Retail, demonstrating that elevating Sports Direct was the right strategy. Our investment in the store estate, our focus on strengthening key brand partnerships, and the synergies created by strategic acquisitions is now delivering very clear results. We’ve also made huge progress in the year building our sector-leading ecosystem, with Frasers Plus now successfully launched across our brands and businesses.  

We enter the new financial year in a strong position and are determined to unlock further growth, underpinned by our laser focus and acceleration of our Elevation Strategy.”

The Equity

Of the 620m shares in issue, the company owns 183m of its own stock, while Mike Ashley holds 330m shares, representing 72.2% of the free equity.

Other holders include Innocap Global Investment Management, Odey Asset Management, Norges Bank Investment Management, Dimensional Fund Advisors, Phoenix Asset Management Partners, Schroder Investment Management, The Vanguard Group, Artemis Investment Management and BlackRock Fund Advisors, with holdings ranging from 2.93% down to 0.54% of the equity.

Brokers’ Views – The Low Share Rating Is Unjustified

Rating the group’s shares as a Buy, analysts Adam Tomlinson and Wayne Brown at Liberum Capital stated that their Price Objective was 1000p.

Upon the group’s guidance yesterday, they are looking for its sales this year to hit £5.78bn, lifting its pre-tax profits up to £522m, while boosting its earnings to 87.8p (70.9p) per share.

The analysts noted that the group’s

“conservative accounting is overlooked by the market, and makes our £10 target price look even more attractive.”

While over at Shore Capital their view is that Frasers’ current share price discount to its peers is

“unjustified, considering the company’s strengthening market position and its exposure to the luxury sector, as well as its significant diversification within the consumer space.”

My View – Easily 1000p Plus In The Short Term

Looking further ahead than this current year’s estimates I see £6.2bn sales in 2025 then £6.6bn in 2026.

That should help to generate £590m profits in 2025 then £635m the year after.

Taking earnings from 105p in 2025 to 120p a share in 2026.

Even with the shares closing last night up 20p on the day at 798p, I really do feel that they are wrongly priced and more than capable of driving ahead above the 1000p level and soon.

That is my Target Price.