It’s rare for FTSE 100 stocks to double in value over a short period.
But here’s how I think shares in Frasers Group (LSE:FRAS) could achieve this feat.
It’s been well documented that the company’s been building up stakes in boohoo and ASOS. It currently owns 17.2% and 26.1% of them, respectively.
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Although his intentions are unclear, there’s been plenty of speculation that Mike Ashley — who may not be CEO now but owns over 70% of Frasers — will launch a takeover bid for one, or both.
The combined stock market valuation of all three is currently £4.62bn.
Purely hypothetically, if Frasers acquired the two online fashion retailers for cash, and didn’t have to issue any new equity, its share price would likely increase by approximately 25% from its current level.
This doesn’t seem like a good deal to me.
That’s because, in December 2023, its shares were changing hands for 16% more than they are now.
Looking to the future
But boohoo and ASOS have struggled lately, which makes them difficult to value.
Although they profited from the pandemic lockdown, rising costs and increased competition have taken their toll and, until recently, they have been loss-making.
And their current market caps reflect this.
However, as shown in the table below, the latest consensus forecasts predict profits to increase in 2024 and 2025.
Different financial reporting measures are used by the companies, but EBITDA (earnings before interest, tax, depreciation and amortisation) is almost equivalent to Frasers’ profit from trading.
During the 26 weeks to 29 October 2023, the owner of Sports Direct made £412m.
To keep things simple, I’ve doubled this to reflect a full year’s trading.
And — in the absence of any forecasts – I’ve assumed that it will remain the same over the next two financial years.
| Forecast earnings | FY24 (£m) | FY25 (£m) |
|---|---|---|
| boohoo – adjusted EBITDA | 62 | 73 |
| ASOS – adjusted EBITDA | 86 | 158 |
| Frasers – group profit from trading | 824 | 824 |
| Combined | 972 | 1,055 |
What does this all mean?
Based on these figures — which clearly come with some caveats — Frasers currently trades on an earnings multiple of 4.5.
Applying this to the 2025 profit forecast for all three would give a combined valuation of £4.75bn — not much more than the sum of their current market caps.
Again, a deal doesn’t make sense.
However, things look very different if the combined group were valued the same as boohoo. Its stock trades at 6.4 times’ EBITDA.
A merger could lead to analysts and investors taking a more positive view of the combined group resulting in a higher valuation multiple.
If this figure were applied to the 2025 expected earnings, the three could be worth £6.75bn.
Frasers shares could theoretically then change hands for 82% more than today. With post-takeover cost savings, I think a doubling has a chance of occurring.
A word of caution
But it’s unwise to invest only because a takeover might occur.
Frasers has minority stakes in other companies and has never indicated that it plans to buy 100% of them.
But as well as existing investors, there’s one person who would be particularly pleased if the share price doubles.
Frasers’ chief executive, Michael Murray, will receive stock worth £100m, if he can get the share price to £15 — for 30 consecutive trading days — before October 2025.
That’s a huge incentive to make it happen. And ‘only’ 85% higher than it is today.
