Stock market analysts are fond of doing sum-of-the-parts valuations of companies, trying to establish whether a business is worth more broken up than staying in one piece. So it was this week with Kingfisher, the DIY retailer that owns B&Q and Screwfix in Britain and Castorama and Brico Depot in France. Paul Moran, who covers Kingfisher at Northern Trust Capital Markets, caused a stir by saying that breaking up the group would release about £1 billion of value not recognised in its stock market quote.
Kingfisher shares rose by 3 per cent on Wednesday as his comments prompted speculation that an activist investor such as Elliott Advisors could move in on the group, though the shares settled back yesterday, closing 5¼p lower at 256p.
Mr Moran’s case was built around the gem that is Screwfix, which is popular with the trade, cost savings and the value of Kingfisher’s freehold property portfolio. He even assumed that the group’s B&Q outlets and its French division were worth zero, which they clearly are not, based on a token £1 paid by Hilco, the turnaround specialist, to buy the Homebase DIY chain. Is he right and what should investors do about it?
Kingfisher was created in 1982 when Paternoster bought out the Woolworths chain, which contained a much smaller B&Q, changing its name to the present one in 1989. It operates 1,302 stores in ten countries, employing a staff of 79,000.
Kingfisher generated more than £11.6 billion of sales in the year to January 31, from which it made statutory pre-tax profits of £682 million, down just over 10 per cent from the previous year. It has been struggling with a fiercely competitive home improvement market in the UK and problems in France, in particular at Castorama, which has struggled to compete on price.
It is midway through a five-year turnaround plan under Véronique Laury, chief executive, who is aiming to cut costs by £500 million and unify product lines across all ten countries by January 2021. So far, she is 42 per cent of the way there, but, as at the end of last year, had saved only £58 million and is on course to save a further £30 million this year.
Kingfisher has argued that the bulk of its savings will come in the last two years of the plan. The company’s share price, down a third in the past two years, suggests the market doesn’t believe it.
Mr Moran’s work, which concludes that a break-up should be strongly considered perhaps in a year’s time, is impressive. He values Screwfix at just over £1.9 billion, based on a realistic multiple of 14 times an estimate of its most recent annual pre-tax profits. Figures from Companies House show operating profits of £117 million on turnover of £1.306 billion for the year to the end of January, equating to a margin of 9 per cent. This all looks credible.
As well as a £3.5 billion property valuation based on Kingfisher’s figures, Mr Moran values the Polish division at £754 million, or six times last year’s pre-tax profits, both also sensible. He then assumes that Ms Laury will save £400 million, rather than £500 million, and multiplies this by four to reach improved profits of £1.368 billion. This is more debatable, but not unrealistic.
In short, the case stacks up that Kingfisher is worth more than its market value. Ms Laury may yet triumph, but the battle looks uphill. Recent evidence, including the departure of senior management in France, suggests that the Castorama turnaround is proving problematic, with much of the costs saved ploughed back into cutting prices to stay competitive.
The stock market values Kingfisher at only 11.6 times last year’s earnings and its shares yield 4.2 per cent. Activists, your move.
ADVICE Speculative buy
WHY Either the turnaround plan will succeed, or if it fails a break-up should follow
Electrocomponents
There seems to be no stopping Lindsley Ruth at Electrocomponents. Since he took charge at the distributor of industrial and electronics products three years ago, it has increased annual pre-tax profits by just over 75 per cent and the share price has more than doubled.
Investors were treated yesterday to their sixth successive quarter of double-digit increases in underlying sales and the likely prospect of a 26.6 per cent rise in half-year profits to about £100 million. Mr Ruth was talking confidently about more growth, particularly in America and Asia Pacific, including China. The shares duly rose by more than 4 per cent, up 30¾p to 749½p — no surprise, as there is a lot to like.
Electrocomponents was founded as Allied Radio in Chicago in 1928 as a supplier of parts for radios and other electrocomponents. It supplies more than 500,000 components, from semiconductors to thermal imaging cameras, including its own-brand products, to more than a million customers in 32 countries, much of it next-day delivery.
Having inherited a company whose share price had been treading water for more than a decade, Mr Ruth set about stripping out costs, improving its online ordering and sharpening the operating profit margin, which has risen from 6.7 per cent when he joined to 10.4 per cent in the year to the end of March.
In a trading update yesterday covering the six months to the end of September, Electrocomponents reported a 10 per cent increase in like-for-like revenue growth, with its own-brand business RS Pro growing faster, at 12 per cent like-for-like.
Having this year completed its first acquisition in 18 years, of IESA, which provides services such as transaction processing and inventory management to companies, Mr Ruth is exploring bolt-on acquisitions in Germany and the United States. He is planning, too, to invest in expansion in Asia Pacific, a division that moved into profit last year.
The shares trade on a reasonably pricey 22.1 times last year’s earnings, but a far less worrisome 18 times forecasts for 2020. The yield is only 1.77 per cent, but the prospects are looking extremely good.
ADVICE Buy
WHY Promise of more growth and operational efficiency
