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I’m sorely tempted to invest in Kingfisher (LSE:KGF) now, despite both the fear of Brexit chaos and the downturn in the DIY market. It’s a company that’s been forced to cope with some serious problems in recent years – many of which it inflicted on itself. As a result, its market capitalisation has fallen from £10bn to £4bn. Nevertheless, Kingfisher remains the strongest player in big-box DIY sheds (B&Q in the UK & Ireland, Castorama and Brico in France and Castorama in Poland). It is also a very significant retailer of building tools and materials to professional tradespeople, especially through its fast-growing Screwfix and the B&Q Trade UK card (and similar schemes in other countries).
Kingfisher’s average earnings per share over the last ten years were 22.1p, and its current share price is 190p. This gives a cyclically adjusted price earning ratio of just 8.7. Moreover, the earnings numbers are remarkable stable, ranging between 16.5p (2010) and 30p (2014) over the decade. Stable that is except for the year to 31st January 2019 when the statutory reported EPS was 10.3p (a shock that contributed to the downward share price trend). But even in 2018/19 “underlying” earnings were 23.9p.
Dividend yield is 5.6%, which, it seems to me, is unthreatened by the risk of financial distress. The company has merely £176m of borrowings (alongside £229m of cash) combined with a history of cash flow from operations north of £600m year after year, and £3.4bn of freehold property on the books. Being a (fairly) fast stock-turn retailer, inventories are covered by credit obtained from suppliers.
Is it reliant on DIY?
As you know, in addition to selecting shares, I’ve been investing in property development projects for many years, and so I’m very familiar with using Kingfisher’s TradeUK card: I (or an employee) can pitch-up at a B&Q or Screwfix outlet, select goods and take them away after showing my card. I get trade prices, and up to 60 day’s credit, with a neat monthly bill.
Why, you might ask, if I’m doing a number of building projects, do I spend so much at B&Q and Screwfix when builders merchants can be cheaper.
I also have accounts with three builder’s merchants and buy a lot from them. Firstly, builder’s merchants are not always cheaper – Kingfisher can be very competitive on some things.
Second, builder’s merchants are great for buying a truck load of heavy items – bricks, blocks, insulation, plasterboard, etc. Play one off against the other and prices can fall dramatically.
But builder’s merchants cannot stock a wide range of the less heavy items – dozens of different light fittings, kitchens, doors, paints, baths, tiles, flooring, etc. That is where B&Q and Screwfix really come into their own. They stock thousands of items to choose from. Thus, Kingfisher has a loyal customer base in tradesmen of all descriptions. It is certainly not for DIY enthusiasts only.
So, why has the share fallen?
In 2016 the recently appointed CEO, Ms Véronique Laury, launched her big strategic idea to transform the Group from one where product ranges and sourcing varied from one country to another. The plan was to have a common set of product lines in France, Ireland, Poland, etc. As well as having “unified” products, the company would have “unique” products that competitors did not stock. There was also to be a one IT system across the Group, and some operational cost savings.
The promise was that the company could reap a benefit amounting to £500m per year, raising profits from the £700m range to more like £1.2bn. It would cost up to £800m to implement all the changes, but it would be worth it in the end.
Making the short-term sacrifice more palatable was the offer of £600m returned to shareholders over three years by way of share buybacks. This was on top of the annual dividend of around £230m.
True to her word, £600m has been spent on share repurchases – and still the balance sheet is strong. At the same time dividends per share rose from 10p to 10.8p. So that is all good.
What was not so good was the poor performance in some parts of the empire. In particular, both Castorama and Brico in France have suffered from poor management. Sales flatlined for nine years, not even keeping pace with inflation. And operating profits from France have fallen from over £400m in 2012 to just £209m in the year to January 31, 2019.
Things have been even worse in the, much smaller, Russian, Iberian and German operations, which have recently been closed.
In the UK sales overall have risen, but that is down to terrific growth of Screwfix which has, to some extent cannibalised B&Q’s sales, where turnover is down from £3.8bn in 2015 to £3.4bn today. Profits are at record levels in the UK.
Other reasons for being pessimistic about Kingfisher advanced in the press:
- People are not DIYers anymore, they get someone to do it for them. I’m………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
