Companies change their names, often in an attempt to turn weak sentiment into recovery. Mike Ashley has renamed Sports Direct International to Frasers Group (LSE: FRAS), presumably to note the group’s new, wider business interests. That it might help distance the firm from criticism of working practices at its warehouses is perhaps a bonus.
The rename might also help get investors back on board. Many of them had become disillusioned by Sports Direct’s apparent strategy of buying up any old distressed competitor that happened to cross the radar. And that led to a devaluation of the old brand.
The rechristened Frasers Group released 2020 results Thursday. Total revenue grew by 6.9% to reach £3,957.4m, but that includes the effect of acquisitions. Stripped of those, like-for-like revenue fell 12.6% on a currency neutral basis. Reported pre-tax profit fell by 19.9%, and the underlying figure fell 18.1%. So no recovery in profits yet.
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Valuation is tricky
It’s not obvious to me how to evaluate Frasers Group against the background of the Covid-19 recession. These figures cover the year to 26 April, so it’s really only the final quarter that would have been hit.
Still, the current uncertainty didn’t hold back the investors, who pushed the Frasers Group share price up 20% at one point during Thursday morning. It fell back a bit from that, but on a gain of 12% at the time of writing, that’s a good bit better than I was expecting. All in all, we’ve seen an impressive recovery from that early Covid-19 slump.
Presumably the bullishness stems from the company’s outlook. Frasers says it “intends to invest in excess of £100 million in its digital elevation strategy“. Presumably that means its online sales channels, and not that it plans to lift a finger. Ho ho.
Forecast growth recovery
The statement continued: “With digital transformation now at the forefront, the successful reopening of our stores after the Covid-19 lockdown and continuing strong web performance, we are confident in achieving between a 10% and 30% improvement in underlying EBITDA during FY21.“
That’s a bold statement to make while Covid-19 is still with us, and in the light of the resulting recession. And it’s way better than the forecasts currently suggest – though they do need to be treated with a lot more caution than usual this year.
Will I buy?
If Frasers Group pulls off that kind of recovery, I’ll rate it as a very impressive achievement. But would I buy right now? A substantial gain in earnings could make the stock’s valuation look very tempting. But it is a firm that carries substantial net debt, and I don’t like that. It did drop from £378.5m to £366m during the year, which is positive. And that’s only 1.2 times underlying EBITDA, which isn’t stretching.
But I’m not sure what Mike Ashley might see fit to acquire next. Has he managed to leave behind his seeming compulsion to try to buy up anything that comes into sight? I’ll wait and see.
