By coincidence Wolseley put out its third-quarter trading statement just as Cobham was finalising its £507 million rescue rights issue. Last Friday Wolseley stunned the market by announcing that Simon Nicholls, its finance director designate, would not be moving from the aerospace engineer.
The market was not much more inclined to like yesterday’s announcement. Although the numbers for the quarter were acceptable enough, the American Ferguson side powering ahead while growth in the UK and on the Continent shrank, the main concern was over a slowdown in the fourth quarter.
In America, industrial, about 13 per cent of that business, remains sluggish because of the downturn in oil and gas investment, though commercial and residential are moving ahead. The real headwind, though, is price deflation, running at about 2.3 per cent. This has clipped earlier quarterly revenue rises that had been moving up to 5 per cent in the third quarter.
In the UK, where most of Wolseley’s business is in repair and maintenance of central heating systems, the market remains slow. This was never going to be the most exciting business because there is not much to spur growth and the mild weather has been a factor, with boilers not much inclined to break down.
Central Europe, mainly Switzerland, remains a drag, the abrupt devaluation of the euro against the Swiss franc last year pulling in amounts of eurozone-originated product to the disadvantage of Wolseley’s business there. The construction market in the Nordic regions became more challenging again. The company is at least shot of its troubled French operation at last.
Across the group, a 2.8 per cent increase in third-quarter revenues has fallen to about 1 per cent since. Margins for the third quarter, though, were up by 40 basis points to 6.3 per cent, which is a positive.
Wolseley shares slumped 223p to £38.28. They had been showing a smart recovery since I tipped them in January, after a near-profit warning in the autumn, but the last thing the market wanted to hear was of a fresh slowdown in its markets and that deflation looks to be here to stay. They sell on 16 times earnings, but I would steer clear for now.
MY ADVICE Avoid
WHY The fourth-quarter slowdown has come as another shock to the market, and there is no obvious catalyst for a recovery
LondonMetric Property
This company is a good punt on a specialist area of the retail and property markets and one that is set to grow, and an increasing number of retail investors, about a third of the share register, are putting their money there.
The name is a bit of a misnomer: the company was formed by the merger of London & Stamford and Metric Property Investments more than three years ago but is increasingly out of the market in the capital, the sale of a City property a year ago having netted investors a 2p special dividend.
Instead the company is moving into logistics, those “big box” distribution depots increasingly needed by retailers selling over the internet. This is a competitive market with a lot of players keen to get in, but LondonMetric has increased the proportion of its portfolio there from 20 per cent at the time of the merger to 54 per cent and can go considerably higher, though it retains other assets, such as convenience stores.
All the numbers in the full-year trading statement are going in the right direction. Rents are understandably low but are being pushed higher and like-for-like rental income was up by 3.1 per cent. The headline net asset value figure of 147.7p is up by 5 per cent and is at a deserved premium to the share price, off 6½p to 158p. That assured income can fund dividend growth, the shares yielding a prospective 4.7 per cent, and the company is switching to a shareholder-friendly regime of quarterly payments. Not a lot not to like.
MY ADVICE Buy
WHY The yield is attractive, funded from a growing sector
Halfords Group
The car parts and bicycle retailer will at some stage return spare capital to shareholders, but not yet. That was the main negative from the full-year figures with the weather-imposed slowdown in the bicycles market last summer already being well signalled. Otherwise the figures came in ahead of market consensus.
Halfords is well into the change programme put in place by Jill McDonald, the chief executive, last autumn. This involves gathering better data on consumers, such as buyers of bikes, a fragmented market where Halfords, one of the biggest names on the block, has a 24 per cent market share.
The trading statement makes it clear that the priorities are spending money on existing and new stores, increasing dividends and then acquisitions such as the purchase of Tredz and Wheelies last week. There are obviously not many such specialist businesses on the market, though there are probably opportunities in motors, which is 70 per cent of Halfords’ business.
The shares, off 31¾p at 407p, sell on 12.5 times earnings. Buy on that price fall, which looks excessive as investing for growth is a good alternative to handing back cash.
MY ADVICE Buy
WHY After share price fall, growth prospect look good
