Frasers Group (LSE:FRAS) was recently demoted to the FTSE 250. Since reaching a 52-week high of 920p last June, the company’s share price has fallen 36%. This was more than enough to see it relegated to the UK’s second tier of listed companies.
Like most retailers, it didn’t fare well from the Budget in October. The employer’s National Insurance hike is expected to cost an additional £50m a year.
Even so, I’m baffled as to why the company’s market-cap’s fallen by so much. At the time of writing (15 January), its stock market valuation is £2.6bn.
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Lots of strategic investments
It’s well known that the group has an appetite for taking non-controlling stakes in other retailers. However, nobody really knows what its medium-term intentions are.
In December, it made a takeover bid for Norwegian sports retailer XXL ASA. And it wants to acquire luxury fashion label Mulberry Group. It’s also in a battle with boohoo to secure board representation. But it’s unclear what it intends to do with its other shareholdings.
In some respects, this doesn’t really matter as they have no impact on the company’s trading results. However, they do have a value.
The company last published a balance sheet dated 27 October. And this disclosed that these investments were worth £1.007bn. Since then, there’s been the usual ups and downs in the share prices of these companies. So to be prudent, let’s assume these shareholdings are now worth £950m.
This means the rest of the Frasers business is valued at £1.65bn.
Impressive earnings
And despite the additional employment costs it faces, it still expects to record an adjusted profit before tax (which excludes the movement in the value of its interests in other retailers) of £550m-£600m, during its current financial year.
| Period | Adjusted profit before tax (£m) |
|---|---|
| 52 weeks to 27 April 2025 | 550-600 (forecast) |
| 52 weeks to 28 April 2024 | 545 |
| 53 weeks to 30 April 2023 | 482 |
Using the mid-point of this range, and assuming a corporation tax rate of 25%, it means the retailing side of the business is trading on an earnings multiple of less than four. I reckon my local corner shop would command a higher premium.
Ironically, if it wasn’t for the fact that nearly 75% of the group’s shares are owned by its founder, Mike Ashley, I think it’d be a takeover target itself. Unless, of course, he wants to take the company private.
Not for me though
But despite this astonishingly low valuation, I don’t want to invest. The stock appears to have fallen out of favour with investors. The company’s recent share price performance is a far cry from September 2022-September 2024, when it increased by an impressive 155%.
As there now appear to be more buyers than sellers for the stock, I believe something significant needs to happen for sentiment to improve. And other than launching takeover bids for one (or more) of the companies in which it’s invested, I don’t know what this could be.
In addition, I have a stake in its close rival JD Sports Fashion, whose share price has also tumbled in recent weeks. I don’t want to have too much exposure to one sector.
