Wolseley, the distributor of heating and plumbing products, insists it has no intention of abandoning its London listing to move to New York. That is despite 68 per cent of revenues coming from the booming US market, along with 87 per cent of trading profits if you include central costs, rising to 78 per cent and 90 per cent if you strip out the Nordic operation which is being sold.
Such switches of location are unusual; Henderson Group, the asset manager, is giving up its London listing in May because of the purchase of Janus Capital, but this is very much governed by particular circumstances.
There are no identical companies quoted in the US, but similar ones trade on a higher earnings multiple than Wolseley shares, which change hands on about 18 times earnings for the year to end-July after their 247p rise to £51.30 yesterday.
Future investment will take place in the US, and the half-way figures give a good indication why. A 6.7 per cent rise in second-quarter operating profits in the US may have been affected by the timing of bank holidays but the annualised like-for-like growth figure was about 5.5 per cent.
Wolseley has been seeing its core heating and ventilation market in the US grow by 4 per cent to 5 per cent in the past seven years and has been adding market share. The UK market is much less diversified, dominated by four big players, and is more competitive and being hit by an increase in price inflation, probably running at 3 per cent to 4 per cent this year because of the lower pound.
The Nordics were officially put under review last autumn but this merely had the effect of flushing out potential bidders. The businesses in four countries have an asset value of about £600 million, which would provide funds to grow further in America. The UK business is being turned around by focusing on about 80 large “destination outlets” stocking a complete range and 420 local ones. That market will continue to be challenging, though it seems Wolseley remains committed to it.
The shares have made a strong showing since the EU referendum given the boost to profits from that sterling decrease and investors should probably think about taking some profits.
My advice Take profits
Why The growth in future is going to come from the US, with plenty of opportunity for purchases, but that seems to be in the price
Cobham
Last Friday Cobham was notified by the Financial Conduct Authority of an investigation into last spring’s £500 million rescue rights issue. On the same day, largely unnoticed, the US government accountability office issued its sixth report into the Boeing KC-46 refuelling tanker programme, which Cobham supplies and is at the root of much of its recent troubles.
The FCA inquiry is embarrassing but has little impact on the investment case. The US report is not all bad news for Cobham; indeed it is broadly supportive even if it is a bit startling to discover just how long the certification and conformity process is taking. The company begins to deliver the wing aerial refuelling pods for the KC-46 this year; the contract runs into the middle of the next decade, while further support and maintenance will stretch out much further.
Cobham had to raise another £500 million in a second rescue rights issue because of the long-term nature of such contracts, and the need to reassure customers the company will actually be around that long. There will inevitably be dilution of earnings, but the rights issue cuts borrowings to below twice earnings, as against an uncomfortable three times, and that ratio will reduce further this year and next as cash is generated.
The issue is at 75p. The shares added 2p to 128¾p. There is every hope that the difficult times are behind Cobham. Investors should take up their rights; if this is the end of the bad news, now could be a good entry point for new purchasers.
My advice Buy
Why Balance sheet repaired by rights issue
United Utilities
Shares in United Utilities are up by about a pound since Tempus recommended them for their reliable, inflation-proofed yield in November. This in no way reflects any great change in the business. Indeed, yesterday’s trading update struggled to say anything terribly interesting. Capital spending for this year will come in at about £800 million, as planned. The firm’s customer approval rating is running ahead of the rest of the industry.
The decision to put the retail offering to business into a joint venture with Severn Trent in the summer will mean a slight fall in revenues, but this is merely an accounting detail.
The company is on the way to paying out a dividend for the year of about 38.9p a share. The reason the shares, off 6p at £10.00 yesterday, have gone sharply ahead this year, of course, is because investors have been recycling their holdings into reliable yield stocks. This means the forward yield on the shares, if you buy them now, has fallen to below 4 per cent.
Existing investors will have no complaints but the shares no longer seem as compelling a buy as they once were, though that inflation protection is a bonus.
My advice Hold
Why Rise in the price makes yield less attractive
And finally...
Premier Technical Services Group is a one-off with no comparable businesses and another of those companies that has come to market with little fanfare. It provides, among other things, safety equipment and ropes that allow people to work on the sides of high buildings. The shares were floated on the Alternative Investment Market two years ago at 52p and have since doubled. Part of the reason for floating was to make acquisitions in what is still a fragmented market, with two in 2016 and six the year before.
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