Sunday share tips: DFS, Ediston Property Investment Company
By Josh White
Date: Sunday 03 Jun 2018
(Sharecast News) - In his 'Inside the City' column for the Sunday Times, John Collingridge was looking at sofa-peddler DFS, noting its braveness in expanding its retail footprint at a time when others - from M&S to Dixons Carphone - are shuttering storefront after storefront.
The company, in its second iteration as a publicly-traded firm, was picking up the pieces left by its failed rivals such as Multiyork as it continues to expand on both sides of the Irish Sea.
In the last year, it has gone from 112 to 117 shops across the UK and Ireland, with plans to open between three and five more each year.
But there was method to DFS' apparent madness, Collingridge said, noting that when DFS opens new locations, it would lump together a number of its brands including Dwell and Sofa Workshop.
The shared sites would Hoover up more customers and minimise rent burden across its brand portfolio, with the company saying it also boosted sales by 15%.
It also gobbled up the apparently "technology-led" rival Sofology last year, which DFS plans to expand with 30 new openings across the UK, whilst maintaining that the new purchase was not cannibalising its existing brands.
On the real estate front, DFS is juicing its landlords, recently telling analysts that it was gunning for rent cuts of between 25% and 45% when leases came up for renewal.
And it keeps its operational costs low as well, manufacturing furniture to order in five UK factories in a bid to reduce stagnant inventory and working capital spend.
The firm has said it believes it can add £40m to its earnings through cutting costs and expanding operations.
Indeed, investors seem to agree, with shares rallying over the last three months and ending last week at 230p, valuing the chain at £487m - giving DFS a tantalising 4.9% projected dividend yield for the current year.
But DFS is in a "precarious position," Collingridge said, noting that it now held onto a third of the UK upholstery market and was more than three times the size of its closest rival ScS.
Debt, too, has risen along with the company's acquisitions, and in January was 2.2x underlying earnings at £173.2m.
Collingridge said a weaker housing market and creeping interest rates mean the firm will need to fight harder for each sale.
It does seem susceptible to such uncertainty - its shares plunged 20% in a day last summer when it issued a warning that uncertainty around the snap election had driven away customers, with like-for-like sales at the half year down 3.5% year-on-year.
And at head office, long-serving boss Ian Filby is boxing up his things, set to be replaced by chief operating officer Tim Stacey.
"With a 32% market share, growth will be much harder to come by," Collingridge said.
"Darwinism on the high street has played into DFS's hands so far, but it is not immune. Avoid."
Over in the Mail on Sunday, Joanne Hart's 'Midas' piece was splashed with a photo of a Dunelm storefront, but it wasn't the struggling homewares retailer she was focussing on.
Rather, she was looking at Ediston Property Investment Company - a retail landlord that reportedly prides itself on owning "the right sites in the right places", even at a time when the high street is struggling to entice the money out of consumers' pockets.
Rather unusually, Ediston pays dividends monthly, giving investors reason to cheer 12 times each year.
The firm floated in 2014 at 100p per share, with the shares now worth 111p apiece which, along with a total annual dividend of 5.75p, gave the stock a yield of 5.2%.
It was also anticipating a higher share price and more generous dividends going forward as it expanded its portfolio and raised rental income - despite what the boardroom at DFS are looking for at their rent reviews.
Hart noted that the Edinburgh-based firm, run by property sector veteran Calum Bruce, took a more thorough approach to its assets, employing a team of 10 surveyors for around 40 properties, rather than the usual single surveyor for 30ish sites.
As a result, it put a lot more effort into analysing sites before buying them, and also apparently spent much more time developing relationships with tenants once a property is acquired.
And, according to Hart, the strategy works, with the company's vacancy rate falling from around 25% at the time of its float to 0.7% today, while the estate had grown from £77m in value to £325m.
Almost three-quarters of the portfolio is in out-of-town retail parks in Scotland, Wales, the Midlands and the North - a sector often seen as somewhat outdated, but is apparently popular with both shoppers and retailers in these car-dependent areas.
Retailers were fans as they offer better value than high streets and enclosed shopping centres, allowing them to open bigger stores and, according to Hart, easy click-and-collect access.
Customers were fans, of their accessibility too, she wrote, adding that Ediston worked to ensure the appropriateness of shops to each location, often focussing on value retail in less affluent areas of the country.
As a result, Hart said Bruce has managed to raise rents, extend leases, and offer retailers such as frozen food supermarket Iceland and value dry goods retailer B&M more space, while at the same time driving vacancies down.
The firm is not all about retail, though, also owning office space - away from the south east, like its retail assets.
Ediston's most recent acquisition is at a development site in Haddington, 15 miles east of Edinburgh, where is plans to build a new retail park.
According to Hart, the town is growing fast with shops few and far between, giving the project room to generate some considerable value over time.
"Ediston Property offers investors a good blend of conservatism, expertise and enterprise," she said.
"Bruce focuses on delivering returns to shareholders so acquisitions and developments are undertaken only if they are likely to boost income and capital growth."
Hart said the board's ambition was to expand the portfolio to at least £500m in the next few years.
"In the meantime, shareholders can enjoy that monthly dividend. At 111p, the shares are a good long-term investment."
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