Hobson: Dunelm's Turnaround Should Be Applauded

THE WEEK: Mornigstar columnist Rodney Hobson shares a good news stock story - and one that looks positive on the surface but is a bad omen for shareholders

Rodney Hobson 15 February, 2019 | 12:28PM
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rollercoaster rollacoaster Dunelm's turnaround should be applauded

The transformation of dead-end Dunelm (DNLM) into dynamic Dunelm has been truly inspirational, one of the few joyful experiences in Britain’s beleaguered retail sector. Congratulations to all who have worked anywhere in the business over the past five years.

Figures for the 26 weeks to 29 December showed revenue up just 1.2% - though that’s a lot better than many in the High Street - but strong like-for-like growth of 6.9% in the stores and 35.8% online. The discrepancy with like-for-likes has come from Dunelm sorting out the problematic Worldstores side.

Customer numbers have increased and gross margins have widened by 1.7% through improved sourcing, helping underlying pre-tax profits to jump 16.7% to £70 million with free cash flow leaping from £27.8 million to £91.2 million. The interim dividend is increased by 7.1%.

Dunelm traded well through the key winter sale period and although it is commendably cautious about second half uncertainties it remains confident of meeting expectations.

The shares have risen almost 50% from a low of 506p just before Christmas so they are no longer an obvious buy. However, the prospective yield for the full year is about 4% so shareholders should be happy to hold on.

Tullow Reinstates Dividend

Hooray, too, for Tullow Oil (TLW), which has come out of a sticky period with its first dividend since 2015 after it swung back into profit. The 4.8 US cents payout will be raised by 50% if all goes well this year.

Tullow produces oil mainly in Africa and South America and while some territories are a little unstable politically the spread is wide enough to ease any worries.

The shares gained 8p on the day of the results and another 7p the day after to reach 226p, from a late December low of 165p. The past five years have been tough, with the shares slumping from just over 900p to 120p three years ago. They have struggled to recover.

I suspect it will be a long time before they rediscover those heady heights but the return of the dividend is a big plus. Worth a look.

All is Not What it Seems for Plus500

Wow, what great results from contracts for difference trader Plus500 (PLUS). Revenue up 65% in 2018, net profit and earnings per share 90% ahead, net cash up 30% and the dividend total is raised by 18%. Not surprisingly, it is hailed by the board as a record financial performance, way ahead of original expectations.

Admittedly the final dividend is below the previous year’s but Plus500 has a policy of returning 60% of profits as dividends so it’s just the way things panned out between the two halves of 2018 and there’s a hint that there could be another special dividend if no investment opportunities occur to mop up surplus cash.

Headlines such as “strong progress”, “continued expansion of global presence” and “leading industry positions improved” litter the statement. Tighter regulation in Europe introduced on 1 August has been offset by gains made in the fourth quarter and in any case the EU is merely creating a level playing field that Plus500’s technology can cope with no trouble.

Hang on a minute! The shares are down a stonking 36%. What have I missed? Oh, just a casual reference to results for 2019 “being materially lower than current market expectations”, slipped in where you are least likely to notice it. Seems like these new regulations are more troublesome than Plus500 was suggesting.

One is left wondering if the fall in the share price could have been any worse if chief executive Asaf Elimelech had been upfront instead of producing the most disgracefully concealed profit warning I have ever come across in 40 years of financial journalism. I advise investors to steer well clear of this company.

Rodney Hobson is a long-term investor commenting on his own portfolio; his comments are for informational purposes only and should not be construed as investment advice, nor are they the opinions of Morningstar.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Dunelm Group PLC1,036.00 GBX-0.77
Plus500 Ltd2,176.00 GBX-0.46
Tullow Oil PLC32.68 GBX-0.43

About Author

Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.

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