We all know UK retail is in a tough spot but problems for Kingfisher (KGF) are ironically not in the UK, where half-year numbers were correctly discussed as a 'solid performance' benefiting from continued growth at Screwfix and the self-inflicting wounds at peers that aided B&Q. The trouble is a 15% fall in underlying pre-tax profit mainly due to a 30% fall in profitability in the group's second-largest market France. Now none of this should be particularly new news in the sense - as I detailed here around a month ago - Kingfisher updated the market on revenue and margin progression. The trouble is...reality is sometimes troubling and comments like 'looking to the full year we remain on track to deliver our strategic milestones for the third year in a row and have put actions in place to support our performance' have not appeared to cut the mustard judging by a 6% fall in the share price. So did I irreparably bog up recommending Kingfisher shares at 3 quid or below in recent months?
Well on my favoured free cash flow measures life still looks good. The company is still chucking out a high single digit free cash flow yield, of which around 4% is returned as a dividend and a not dis-similar amount has been returned in buybacks. So if you are a dividend muncher, you should be pretty happy. Value investors should not be too hacked off either given the share is trading at around a x10 P/E. Of course what matters is not where a company has been...it is where it is going.
The transformation plan One Kingfisher continues to prove up with sensible innovations like unifying ranges and boosting digital competencies. Frankly I would be worried if the company was not naturally doing these sorts of things... I think the fundamental problem though in France is that it is earlier than in the UK with the transformation process AND the French economy has not been gangbusters or (like the UK) having peers shoot themselves in the foot. Nevertheless this is all in the numbers and for it to get worse in France...feels unlikely. The bigger risk I would say would be a revitalised Homebase under private equity ownership aligned with a huge downturn in the UK property and related markets that suckers DIY/renovation activity. There is no doubt the property market is hassled but renovation continues as a solid theme. Meanwhile private equity is going to be running Homebase for cash, so expect a price-following strategy from it.
I guess if you wanted to be worried you would point to the slight edging up of the lease adjusted net debt to EBITDAR ratio of x2.5. Obviously "EBITDAR" (Earnings Before Interest, Taxes, Depreciation, Amortisation, and Rent) is one of those mildly comic ratios but, as the banks like it, it is worth monitoring. My view would be that the level of free cash flow being generated can get it out of any trouble for the time being. Put it all together, I see the fall as more of an opportunity than a threat. After waiting a sensible period of time for this piece to land and be distributed/absorbed, I am going to buy some more stock.
Filed under: Kingfisher, KGF, WPCT, Neil Woodford, Premaitha, Versarien, gold, Malcolm Stacey
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