FTSE 100 firm Kingfisher (KGF) released half-year results this week which were well received by the market despite a near 6% fall in profits and 1.3% drop in sales across the group. Kingfisher owns Screwfix and B&Q and is the biggest DIY chain in Europe.
Investors were more focused on progress being made in the five-year turnaround plan called “One Kingfisher”, which aims to add £500 million to annual profits by the end of 2021. The shares rose around 6% on the news, supported by plans for a £60 million share buyback in the next three years. Kingfisher shares yield over 3%.
Kingfisher continues to accelerate successfully into the execution of its ONE Kingfisher plan during the second year of its adoption. While demand could be uncertain near term, with management expressing caution on the economic backdrop for the second half of the year in the company’s biggest markets in the UK and France, Morningstar equity analysts think it has nicely kept costs under control.
The IT rollout to unify brands remains on track to be completed next year. Furthermore, the reduction in costs of goods not for resale is set to surpass £20 million this financial year, cumulatively reaching above £50 million since the ONE Kingfisher inception, and marking the halfway point to the £100 million target.
Given that the economic outlook does not significantly differ from our forecast, analysts do not plan any material change to our 352p fair value estimate and view shares as modestly undervalued at around 309p.
The company anticipates flat gross margins for the year and earnings per share in line with consensus forecasts. We don’t expect to adjust our five-year outlook, which includes 2% average annual revenue growth, gross profit margins that expand to 38% and operating margins that average 6.4%.
The company’s sales update provided in August left us with little surprise on first half top line results last week. Kingfisher delivered 1.3% sales decline on a constant currency basis for the first half of its 2018 financial year, with like-for-like sales falling 1.3%. However, favourable currency movements resulted in 4.5% top-line growth, putting the company on track to achieve the 3% sales growth we have projected for the year.
Morningstar equity analysts were most disappointed in sales at B&Q stores - the company’s largest business, accounting for almost one third of sales - which delivered top-line declines of 6% in the half. This weakness was greater than we expected, with like-for-like sales coming in at -2.3%, behind the positive 1% we project for 2018 and beyond.
While we expected economic factors to temper growth in the region, Screwfix stores continue to thrive, posting like-for-like growth of almost 12%, leaving it on pace for its fourth straight year of mid-double-digit growth, ahead of our 4% forecast. Like-for-like sales growth in France continues to pace slightly behind the negative 2% we forecast for 2018, falling 3.8%.
However, we expected the first half would be weaker than the second, given easier comparisons in the back half of the year, and sales showed signs of strengthening in the second quarter versus the first, leaving us comfortable with our full-year forecast. We also intend to maintain our long-term forecasts for other international markets, where like-for-like growth of 0.3% was in line with the flat performance we projected.
