The Frasers Group (LSE: FRAS) share price gained 8% early on 18 July, on the back of full-year results.
Under the heading of ‘Sustained profitable growth’, the numbers look good. Yet Frasers shares sell for less than 10 times forecast earnings.
The price keeps threatening to surge this year, but then falls back. It’s more than trebled in the past five years, though. Maybe that alone should make investors a bit wary.
Big profit jump
Frasers uses adjusted profit before tax (APBT) as one of its key metrics. For the year ended 28 April, APBT jumped 13% to £544.8m.
That’s at the top end of the firm’s £500m-£550m guidance. And adjusted earnings per share soared 34% to 95.8p.
Guidance for the 2024-25 year suggests APBT of £575m-£625m. If it hits the upper end again, we could see a further 14% rise.
CEO Michael Murray reckons this “has been a breakout year for building Frasers’ future growth.” If his optimism isn’t misplaced, the next few years could be rosy.
Reasons to be cautious
I come back to the low valuation of Frasers shares. One possible reason is the lack of dividends, at a time when there are some big ones to be had.
When I see a 9% yield at Legal & General, and 10% at Phoenix Group Holdings, why wouldn’t I go for those instead? In fact, I probably would. But that doesn’t mean I wouldn’t buy Frasers if I had enough money to go round.
Frasers has been handing back cash though, via £126.4m in share buybacks.
And talking of dividends, the update said: “The board remains of the opinion that it is in the best interests of the group and its shareholders to preserve financial flexibility and facilitate future investments and other growth opportunities. The payment of dividends remains under review.“
Healthy balance sheet
I also don’t like debt, so what does that look like?
Net debt rose by £30.8m to £447.6m. But this is a company with a market cap of £3.7bn, and annual revenue of £5.5bn. Oh, and one year’s adjusted PBT is enough to cover it.
Liquidity problems still plague the retail business, after the tough few years we’ve had. And that would keep me away from many in the sector.
But debt doesn’t worry me at all in this case. Maybe that “preserve financial flexibility” thing makes sense.
Time to buy?
Frasers is in a fickle business. Just look at Burberry Group to see how quickly things can turn bad.
And I think we could see some profit-taking by investors who bought before the big rise. So, a second half of share price weakness in 2024 wouldn’t surprise me.
I probably won’t buy Frasers shares right now, because there are others I like better. But if I had enough cash for every stock I thought was undervalued, I’d bag some Frasers for sure.
Any share price dip later in the year might swing it for me.
