Broker says Adairs (ASX:ADH) share price is cheap after selloff

Adairs had a tough first half due to COVID…

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Key points

  • Adairs shares were sold off this week following the release of a trading update
  • While its sales were largely flat, its earnings almost halved
  • Morgans believes investors should buy the dip

The Adairs Ltd (ASX: ADH) share price is having a week to forget.

Since this time last week, the furniture and homewares retailer’s shares are down a massive 22%.

That’s despite the Adairs share price managing to push higher on Tuesday when the market sank 2.5%.

What happened to the Adairs share price?

Investors have been selling down the Adairs share price this week following the release of a first half trading update.

Although Adairs’ recorded sales broadly in line with the prior corresponding period, significant weakness in its margins means that its earnings will almost halve during the period. COVID impacts and store closures were behind this margin weakness.

Is this a buying opportunity?

The team at Morgans has given its verdict on the update. And while the broker was bitterly disappointed with the company’s performance, it remains positive on the investment opportunity here. This is due largely to the low multiples its shares trade on and the generous dividend yields on offer.

According to the note, the broker has retained its add rating and cut the price target on the company’s shares by 23% to $3.70. Based on the current Adairs share price of $3.04, this implies potential upside of 22% over the next 12 months.

In addition, the broker is forecasting fully franked dividends of 19 cents per share in FY 2022 and 26 cents per share in FY 2023. This equates to yields of 6.25% and 8.55%, respectively, over the next two financial years.

Morgans commented: “Today’s trading update was a disappointment and has led us to lower expectations for full year earnings. The share price reaction to the statement was, however, greater than we had thought appropriate. The FY23F P/E of 7.6x with a dividend yield of 8.7% are attractive enough for us to retain an ADD rating.”

“We think it is important not to overlook a resilient topline performance in 1H22. Sales were flat yoy at $242m with positive group level LFLs of +2.7%, or +30.5% against 1H20. Store LFLs were (3.4)%, which was better than expected, although this was offset slightly by a softer Adairs online growth rate of +1.6%,” it added.

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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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