The Kingfisher (LSE: KGF) share price hit a new multi-year low of 188p last month, but had climbed back above 200p ahead of today’s half-year results. It’s struggling to keep its head above that level, as I’m writing, but I think now could be a good time to buy this FTSE 100-listed owner of B&Q and Screwfix.
In this article, I’ll review today’s results, look at the valuation and prospects of the business, and explain why I’m bullish on the stock.
Current performance
Chief executive Véronique Laury, delivering her last results before her departure, highlighted the group’s continuing transformation activity and cost efficiency initiatives, but had to report a 0.9% decline in sales (at constant currency) and a 6.4% fall in underlying pre-tax profit.
On a like-for-like basis, sales fell 1.8%, with the company reporting a continuing mixed performance and outlook by geography. To understand the problem areas of the business, the table below shows the company-compiled consensus (as of 12 September) for first-half like-for-like sales, today’s actual numbers, and the consensus forecasts for the full year.
|
|
H1 forecast (%) |
H1 actual (%) |
FY forecast (%) |
|
B&Q UK & Ireland |
(2.0) |
(3.2) |
(2.0) |
|
Screwfix |
4.0 |
5.1 |
3.5 |
|
Total UK & Ireland |
(0.1) |
(0.7) |
(0.1) |
|
Castorama France |
(3.5) |
(4.3) |
(2.6) |
|
Brico Dépôt France |
(4.3) |
(4.6) |
(2.4) |
|
Total France |
(3.8) |
(4.4) |
(2.5) |
|
Poland |
4.0 |
3.3 |
3.1 |
|
Other* |
|
(2.8) |
|
|
Total Poland and other |
|
1.2 |
|
* Iberia, Romania, Russia and Screwfix Germany (online).
As you can see, in areas of the business where like-for-like sales declines were expected, they were worse than analysts had forecast. B&Q’s miss was particularly wide, with the company saying the discontinuation of installation services negatively impacted the number by 2%. With Screwfix delivering a strong positive UK performance, France continues to be the major problem geography.
Prospects and valuation
On the face of it, Kingfisher may not appear a particularly promising investment today. However, while a move to an ‘everyday low prices’ strategy in France has produced short-term pain, I expect to see sales improve next year and beyond. Indeed, I think we can anticipate progress across the group as its wide transformation initiatives bring both top- and bottom-line advances.
I reckon the market’s current valuation of the stock underrates the outlook of the business. At a share price of 197p, we’re looking at 9.2 times current-year forecast earnings, falling to 8.4 next year on forecasts of 9% earnings growth. A 5.5% running dividend yield also looks sustainable, as the company has a strong balance sheet, with reasonable (and falling) net debt.
Value-unlocking potential
Finally, a number of analysts argue that Kingfisher’s market value of £4.16bn is significantly lower than it sum-of-the-parts valuation, making it a potential target for private equity or a good candidate for a value-unlocking break-up. Furthermore, changes of management are often a catalyst for such major corporate activity, and at Kingfisher we have a new chief executive, Thierry Garnier, taking up the reins next week.
Now, I wouldn’t buy a stock purely for its takeover or break-up potential. In the case of Kingfisher, I see a business going through a troubled phase, but with a credible strategy to deliver an improving performance in the coming years. I think the market is currently undervaluing the medium- and longer-term outlook for the business, and it’s on this basis that I rate the stock a ‘buy’. The fact there’s potential for unlocking value for shareholders in the shorter term is simply the cherry on the cake.
