With almost 90 per cent of profits coming from the United States and now renamed Ferguson, after its business there, it is appropriate to ask whether one day the old Wolseley plumbers merchant group might opt for a quotation on the New York Stock Exchange, where some comparable businesses enjoy higher multiples.
It will not happen any time soon, its management insists, even if some shareholders have raised the subject. There is already an American Depositary Receipt programme in the US, traded on an over-the-counter basis, and it is plausible that this could be quoted on the NYSE. In any event, the next set of results will be in dollars, therefore avoiding any fiddling around with currency effects.
In the US, Ferguson is continuing to increase its market share, with like-for-like revenues ahead by 7 per cent last year in a market growing by about 4 per cent, helped by a steady stream of small acquisitions. Any shortfall since July’s financial year-end from hurricanes Harvey and Irma will be made up in due course. There was a degree of margin erosion because of earlier investment but the trend quarter-by-quarter was positive enough in revenue terms.
In Britain, trading remains tough. Some have suggested that this business might be sold, along with its operations in the Nordic countries. In reality, Ferguson is only part-way into a two-to-three-year turnaround programme there and now is probably not a good time to sell. We are assured that an offer will arrive for the Nordic businesses by the end of 2017 and at a price that will reflect well on the £600 million book value. That business, carried as a discontinued operation, managed to improve trading profits by £4 million to £63 million ahead of a £102 million write-off to reflect the pending sale.
The main news yesterday was the £500 million share buyback. This looked inevitable, strong cashflow having reduced debt by about £400 million to £534 million despite £292 million being spent on acquisitions, and the receipt of funds from the Nordic sale should allow it to continue.
Some might quibble whether the return to investors should not have been in the form of a special dividend. The shares, up 196p at £50.60, are trading towards the top of their range and on 15 times earnings, so it would require a strong faith that they have further to go to buy them in the market. That said, further progress does look likely.
My advice Buy
Why The US business is growing strongly while the share buyback should be extended once the cash from the Nordics sale is in
Electrocomponents
The recovery at Electrocomponents from the dark days of 2015 continues, but some are wondering just how much further it can go. The trading update to mark the end of the first half indicates further progress, with analysts inclined to extend their earnings forecasts for the year to March 31 by a few percentage points.
Electro came to grief because it fell down in supplying its customers with the components they wanted, not helped by the extraordinarily fickle markets it serves. Both trends are now moving in the other direction and all five geographical divisions experienced double-digit revenue growth, with Asia and emerging markets, a weak spot in the past, leading the way. The interim profits will get a £5 million benefit from the weakness in sterling because the majority are earned overseas, but the rise in revenues, against largely fixed costs, will bring them in at the pre-tax level at about £78 million, against £55.1 million last time.
Margins will be back to about 10 per cent this year, while a 14 per cent rise in digital sales halfway will help towards this. Comparators in the second half will become tougher, but the board sounded comfortable enough with the last £5 million of the projected £30 million cost savings on target.
The problem for investors is that the shares, up another 34½p at 673p, have risen from about 350p over the past year and now sell on 25 times this year’s earnings. That seems a high multiple for a business such as Electro, which has little forward visibility of revenues.
My advice Hold
Why Shares look expensive, but potential for acquisitions
ITE Group
ITE could hardly be in a worse position today than it was a year ago. Its two main markets for the exhibitions it puts on are Russia and Turkey. The latter was hit by the failed coup, with international exhibitors remaining wary of booking space. Russia, though, has had some improvement in its economic performance, the main driver for such events as companies become more confident that spending will bring benefits.
Both markets have now stabilised. Meanwhile, ITE has been carrying out a restructuring that involves the dropping of some less successful events and an emphasis on getting future bookings in earlier, which tends to mean clients have a better experience and are more inclined to come back. It also brings in extra cash and debt of £50 million at the financial year’s end in September was below market expectations.
Revenues for the year will be up 3 per cent on a comparable basis, the first like-for-like growth since 2013. Bookings for the current financial year were running at £79 million, up by 18 per cent even allowing for closed events. The shares, up 2½p at 180½p, have advanced from a bit more than 150p at the start of the year and, on almost 23 times earnings, look up with events.
My advice Avoid
Why Further progress looks limited over the short term
And finally...
When Learning Technologies came to Aim in November 2013, it set itself some punchy targets for 2018 — revenues of £50 million a year and margins of 20 per cent. The little-known company, which provides training modules for companies, achieved the targets a year ahead of schedule and yesterday, at a capital markets event, it reset the dial. It is now forecasting a doubling of revenues by 2020 to £100 million with earnings to exceed £25 million. The shares ended up 6.3 per cent at 59p.
