Selling tools and other kit to odd-jobbing DIYers for a healthy profit has become an increasingly tough proposition for Travis Perkins. Three years of pressure on sales and margins at its consumer business probably makes it a smart move to tidy up the vast majority of it for a sale and concentrate on serving the trades.
Travis Perkins began life as the Benjamin Ingram company in 1797 and was transformed into its present guise via a series of mergers and acquisitions, including of the Wickes Home Improvement Group in 2005. As well as Wickes, it trades as Toolstation and Tile Giant for consumers and other brands, including City Plumbing, Keyline and BSS, supplying the plumbing and heating trades and small builders. It employs 27,500 staff in 2,000 locations in Britain and made pre-tax profits of £330.6 million last year on revenues of more than £6.4 billion.
At a capital markets day last week, Travis Perkins told investors that it would be putting its plumbing and heating division up for sale and was sharpening up the performance of Wickes, almost certainly to do the same with its DIY chain over the next couple of years. It also said that it would be targeting £20 million to £30 million a year of cost savings, which it hopes it can deliver over the next 18 months. In short, the FTSE 250 builders’ merchant hopes that auctioning the businesses not only will put some money in the coffers (some of which might be returned to shareholders) but also will help to improve the stock market rating of what’s left.
Let’s start with plumbing and heating, which solely supplies the trade. This generated revenues of more than £1.36 billion last year, but painfully thin margins of 2.3 per cent made for adjusted operating profits of £31 million. Analysts at Liberum reckon that operating profits will increase to about £41 million this year and, applying an achievable multiple of about ten times, they estimate that it should fetch £400 million to £500 million in a sale, probably to a private equity buyer. That would mean Travis Perkins would have the scope to dispense with its net debts, which stood at £342 million last year, with change to spare. That’s not a bad start.
Wickes sits with the flourishing Toolstation hardware operation inside the consumer business, which generates nearly £1.6 billion in annual revenues and is more complicated. Analysts estimate that Toolstation, which Travis Perkins is keeping, is forecast to make about £350 million in revenue and £21 million in operating profits this year. This implies that Wickes will turn over nearly £1.3 billion and make operating profits of about £41 million. Apply the same multiple and Wickes should also be worth about £400 million to £500 million, though its considerably higher margins mean it could be valued at a bit more.
However, this is a business that Travis Perkins is having to work hard to stabilise. After a record year in 2016, trading at Wickes deteriorated sharply, in part as confidence seeped out of the housing market, which is closely linked to home improvement, in the wake of the Brexit vote. The arrival of Bunnings, the Australian group that bought Homebase and increased competition over prices, also disrupted trading, though the rival chain has since been sold to Hilco, the debt specialist, and its spectre has dimmed.
Travis Perkins has been taking costs out of Wickes and hopes to stabilise its annual operating profits at the current year’s level, which should make the sale possible. While investors await the outcome, Travis Perkins shares, up 32½p to £10.86½ yesterday, trade at an inexpensive 11.8 times earnings and yield a rather good 4.2 per cent. Hang on.
ADVICE Hold
WHY Management has taken the right strategic steps but now needs to deliver
Scottish Investment Trust
Being unfashionable has brought rewards for the Scottish Investment Trust over the past 12 months — not stellar returns, but respectable enough to ensure that its shareholders will be happy with a healthily increased dividend, declared as part of a new policy to dole out a much higher payout.
The Scottish Investment Trust was set up in Edinburgh in 1887 with £250,000 of capital, which has since swollen to £715.3 million, although the discount at which the shares tend to trade compared with its assets means that it has a market value of £611.5 million. Managed by Alasdair McKinnon, it markets itself as a high-conviction contrarian investor that defies the temptation to follow the herd. There are stocks in its portfolio that have been out of favour with the wider stock market, such as Standard Chartered and Marks & Spencer.
Some of these “ugly ducklings”, to use its words, lifted its performance over the 12 months to the end of October. Tesco, its biggest position, returned 19.4 per cent, while the value of the Macy’s American departments stores group doubled. That offset losses at ING, Standard Chartered and BNP Paribas, three lenders, and Adecco, the jobs agency, and meant that the trust finished the year having improved its net asset value per share by 1.1 per cent. While it has no formal benchmark, it outperformed the MSCI UK All-Cap index, but did less well than the MSCI All Country World index.
Having raised its annual dividend in 2017 by 48 per cent and vowed to make regular quarterly payments to investors, the trust lifted the payout by a further 6 per cent to a total for the year of 21.2p and declared a special payment of 4p a share.
Its holdings are reasonably diverse, with a slight bias towards the energy, financial and consumer sectors, though in each of these areas it owns a combination of generous dividend-payers, turnround plays and lowly rated stocks that may yet come good.
It is clearly a generous payer of dividends, distributing virtually all of its earnings to investors this year. A formal mechanism to limit the discount, by buying back shares if necessary, is also reassuring. For those prepared to be patient.
ADVICE Buy and hold
WHY A shareholder-minded trust that should deliver over the long term
