Broker names Adairs (ASX:ADH) shares as a buy for growth and income investors

Is Adairs an under the radar gem?

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If you’re wanting dividend and growth options, then it could be worth considering Adairs Ltd (ASX: ADH) shares.

One leading broker believes that it could be an under the radar growth star with potentially big dividend yields.

Why could Adairs be a share to buy?

Adairs is a leading retailer of furniture, homewares, and home furnishings in Australia and New Zealand through its core Adairs brand and online Mocka brand.

In addition, the company has signed an agreement to acquire Focus on Furniture for $80 million. Management believes the acquisition is a clear strategic fit, with attractive growth potential and exposure to the $8.3 billion bulky furniture category.

The team at Morgans is a fan of the deal. And while it acknowledges that the acquisition only adds to the market’s concern that Adairs’ organic growth is limited in the near term, the broker feels this view is incorrect.

Morgans commented: “It seems to us that the market sees ADH as a COVID beneficiary that is unlikely to deliver much in the way of organic growth over the next few years. Buying Focus perhaps hasn’t done anything to dispel this notion.”

“But we think that’s unfair. Our estimates are for an EPS CAGR of 21% between FY20 and FY24F. The acquisition of Mocka and Focus play a large part in driving this, but even organically, a combination of a very strong loyalty programme, GLA growth and cost efficiencies underpin a growth story that we think is going under the radar,” it added.

Adairs’ dividends

As well as strong earnings growth, Morgans is forecasting generous dividends in the coming years.

According to the note, the broker has pencilled in fully franked dividends per share of 23 cents in FY 2022 and then 29 cents in FY 2023. Based on the current Adairs share price of $3.82, this will mean yields of 6% and 7.8%, respectively.

Morgans also sees significant upside for the Adairs share price. It has an add rating and $4.80 price target on its shares, which implies potential upside of almost 26% over the next 12 months.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns and has recommended ADAIRS FPO. The Motley Fool Australia owns and has recommended ADAIRS FPO. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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