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Over the last six months, we have built a position in Frasers Group, the £3.5bn market cap retail empire controlled by Mike Ashley, which trades at a 44% discount to our estimated NAV. The vast bulk of NAV is accounted for by UK Sports Retail, International Sports Retail and Premium Lifestyle retail, however over time Property (5% NAV) and Financial Services (4%) will likely grow in stature, and the portfolio of listed equity stakes (6%) provides both strategic and financial optionality. Despite its status as a FTSE100 company, we believe there is a vast gap between popular perception and reality. The assets are of higher quality than is commonly perceived, and this is masked in the consolidated accounts; the strategy (or rather perceived lack thereof) is seen as haphazard and poorly understood with limited historic communications with The City; and the controlling shareholder is thought of as oafish, despite being arguably the greatest retailer of his generation, as well as a tenacious and sagacious deal maker.

From one sports shop in Maidenhead in 1982, the company grew to 465 stores and £1.2bn of sales in the year prior to its listing as Sports Direct International in 2007. Since then, the company has grown and diversified further, with >1,630 stores and revenues of £5.7bn, whilst reducing its share count by close to 40%. Despite the group’s diversification (and indeed name change), the bulk of the value still lies in UK Sports Retail, which accounts for over 70% of underlying retail profits. Principally through Sports Direct, the company is the #1 sports retailer in Britain.

Over the last twenty years the industry has consolidated (Sports Direct & JD Sports account for ~70% market share) and segmented between sports equipment (Sports Direct) and trainers/apparel (JD Sports). This results in significantly lower competitive intensity than is perceived (~10-15% SKU overlap) and makes Sports Direct an increasingly crucial channel for brands to reach customers outside of major cities. The concentrated nature of the supplier base (Nike & Adidas) erects high barriers to entry, with the approval of these two gatekeepers a pre-requisite for doing business.

However, it clearly also presents a key risk, having been the genesis for Sports Direct’s “Elevation Strategy” over the last half decade. This has seen the company evolve from its stack-em-high-sell-em-cheap model which readers might remember, and that one journalist memorably referred to as “quasi-claustrophobic.” We expect the UK Sports Retail business to continue chugging along as a cash cow (with cumulative group operating cash flows of >£3bn since 2015) and for these cash flows to be invested in creating new growth avenues, as well as increased shareholder returns, with an £80m buyback having recently been announced. Looking ahead one key area of focus will be in International Sports Retail where, with brand relationships at an all-timehigh, there is an opportunity for consolidation in the highly fragmented European market.

As well as this, swimming against the tide, Frasers has bought and built a ~15% share in the £11bn UK premium / luxury clothing market, such that we estimate that they capture close to £1 in every £3 pounds spent outside of own-brand stores. Whilst 85% of department stores have closed in the UK since 2018, through House of Fraser and Flannels, the group is filling the void as the way for luxury brands to reach customers outside of London. The exodus of other players means the group, in conjunction with Sports Direct, can achieve highly favourable lease terms, often with low turnover-based rents and landlords making considerable capex commitments. We are also optimistic about the budding Financial Services business that Fraser’s has started to build – both in of itself (profits) and for the second order effects it endows (incremental sales).

The acquisition of Studio Retail brought with it a hard-to-come-by consumer credit license, and the focus is now on the roll-out of Fraser’s Plus, the group’s in-house Buy Now Pay Later offering. Financial Services achieves trailing operating profits just shy of £60m. We note Next’s financial services business is nearly three times larger and see no reason why Fraser’s can’t achieve similar success. Finally, capital will likely also continue to be allocated to real estate and stakes in listed businesses, both areas where the company has shown itself to be a shrewd operator. The attractions and value potential seem far from reflected in the current share price, which languishes at 9x this year’s underlying earnings.

Looking out to next year, the shares trade at 8x, a discount of c.40% to peers (adjusting for depreciation differences), and well below the 14x they have averaged since the listing in 2007. Under the leadership of Michael Murray – who is incentivised to the tune of £100m to lift the share price from the current £8 to £15 by October 2025 – we believe the company is not only taking steps to drive value creation but also to rectify the undervaluation. Recent measures to improve financial disclosure, renewed investor relations activity, significant board additions, and continued share buybacks are moves in the right direction, although there remains lots more to do.

The combination of a cheap valuation, attractive, growing underlying assets and a strong alignment of interest with management and key shareholders gives rise to an interesting setup.