Interactive Investor

Undervalued Sports Direct in profits beat

28th May 2015 12:43

Lee Wild from interactive investor

Mike Ashley's Sports Direct is today hosting an annual conference for 900 staff and partners from major suppliers. And, it seems, an undercover TV documentary, which exposed zero-hours pay and questionable business practice, has had no effect on business. The controversial high street sports retailer will make more this year than last, and the share price is up 5% Thursday.

Attendees at the conference will be told that business is currently in line with market expectations for underlying cash profit of £380 million. But underlying pre-tax profit and earnings per share (EPS) is ahead of forecasts.

"This is primarily as a result of our continued and prudent depreciation policy and lower interest charges," said the firm. Net debt has narrowed from £212 million a year ago and £186.5 million in October to £60 million - a sharp increase in the share price of both Debenhams and JD Sports, in which Sports Direct has a big stake, will have helped.

Company bosses will also be talking about investment in Sports Direct's large format UK city centre stores and in its ten Austrian megastores. There'll also be an update on plans for combined gym and sports retail concepts. We'll get more detail when results for the year ended 26 April 2015 are published on 16 July.

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"Relative to an absence of newsflow and lowish delivered sales performance year to date, we would expect this news to be well received as it appears to confirm control over profit margins based on the UK market position and significant cash generative capacity," writes Espirito Santo analyst Tony Shiret.

"Some of the net debt beat will likely have come from the recovery of the Debenhams share price - so it would be wrong to over-read the cash flow implications in our view - but they are still positive."

Trading on 15.5 times forecast earnings for 2016, dropping to 13.7 the year after, Shiret still thinks the shares are a 'buy' and worth 850p.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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