Dunelm rises as RBC upgrades to Buy on 'well run' model, 'undemanding' valuation

Investing.com -- Dunelm Group (LON:DNLM) received an upgrade at RBC Capital Markets on Tuesday, from Sector Perform to Outperform. The company’s shares climbed 2% in London trading.

The upward revision follows the analysis of industry data which showed that the UK home-related retail sector had a challenging year in 2024. Despite these conditions, Dunelm's performance stood out as the company succeeded in increasing sales and capturing more market share.

“[Dunelm’s] model remains well run and cash generative, and it has more runway for growth now, given its recent acquisition in Ireland,” RBC analysts led by Manjari Dhar said in a note.

With the company's shares trading at approximately 12 times its estimated 2025 earnings, RBC views the valuation as “undemanding.” The research firm anticipates a special dividend announcement of 25p per share at Dunelm's first-half results later in April.

Alongside the upgrade, RBC analysts have made slight upward revisions to their earnings per share (EPS) forecasts for Dunelm for fiscal years 2025 and 2026.

They also suggest that the fair value of Dunelm's shares, as indicated by their discounted cash flow (DCF) model, is around 1,175p. This valuation is based on a target price-to-earnings (P/E) multiple of 15 times, which RBC believes is reasonable for a leading market player with strong cash generation capabilities.

RBC also points to positive signs in the housing market as a supportive factor for Dunelm's sales. The company's resilience in 2024, despite economic challenges, is expected to continue into 2025 as the market share is projected to grow further.

“Our UK Housebuilders team expects a further increase in housing activity in 2025,” analysts continued.

“Longer term, the new Labour Government has highlighted a focus on housing market investment, including a potential return of the help-to-buy scheme, which should be supportive for topline sales. We also expect DNLM's range advantage and strong price-value positioning to allow it to continue to drive market share gains.”

Lastly, RBC acknowledges the cost pressures Dunelm faces, particularly from rising labor costs and the recent strengthening of the US dollar against the British pound.

About 30% of Dunelm's products are sourced from Asia and priced in US dollars, which could impact gross margins in the second half of fiscal year 2026. However, the investment bank notes that Dunelm's strong relationships with UK suppliers and pricing strategies may mitigate these headwinds.

This article first appeared in Investing.com