Considerably stronger-than-expected cash flow at Wolseley helped offset a halving of the plumbing supplies group’s pretax profit over the year to July 2009 and sent shares surging more than 10% higher on the FTSE 100 index.
In afternoon deals on Monday, Wolseley topped the FTSE 100 leaderboard with a gain of 10.2%, up 134p at 1,443p per share. The FTSE 100 index subsequently added 65.7 points or 1.3% to 5,147.9.
The company this morning reported final results for the year ending 31 July 2009, with group profit before tax, exceptional items, amortisation and impairment of acquired intangibles landing at £293 million, an annual drop of 54% in constant currency, while the inclusion of unusually high exceptionals meant the company reported a pretax loss of £1.05 billion or a loss of £1.17 billion after tax. However, such large negative figures had been widely expected and were therefore shrugged off by analysts in favour of pleasing cash flow and net debt figures.
Company cash flow was much stronger than many had expected, with net debt at the end of July amounting to £959 million compared to £2.5 billion the year before.
“Figures were broadly in line with our estimates,” commented Numis Securities’ Howard Seymour, “with the exception of the net debt profile which was significantly better than our forecast (and the most recent net debt figure).”
Numis continues to believe that there is good medium term value in Wolseley and that management actions are key to unlocking the group’s potential. However, the broker still favours early cycle plays that are exposed mostly to UK housing and RM&I (repair, maintenance and improvement) within the sub-sector of builders merchants. Numis today downgraded its recommendation on the Wolseley stock to Add from Buy with a price target of 1,550p.
Today’s results represent a “watershed,” according to Charles Stanley analyst Tony Shepard, who noted that the £1.2 billion post-tax loss shows the scale of the difficult trading conditions that led to the group’s £1 billion capital raising in April and a new chief executive being appointed in July. “We take some solace from some of the more positive trends such as that of improving cash flow in spite of the lower profitability,” Shepard commented, adding that not only has net debt fallen much more than he expected but also potential efficiencies for 2020 are better than forecast.
Wolseley today said cost reduction actions already taken are expected to result in an incremental benefit in full-year 2010 of £233 million, up from the £192 million that the group previously guided to.
Looking ahead, Charles Stanley expects first-half trading in the new financial year to July 2010 will likely remain tough “but after the restructuring benefits we look for a small increase in annual profits though EPS will be diluted by the increased shares in issue following the £1 billion capital raising in April,” Shepard says.
The broker believes the shares currently look fully valued after a near-40% rally over the last six months but still Charles Stanley has a Hold recommendation as it believes there may be a strong profit recovery beyond 2011.
At Panmure Gordon, analyst James Cooke said the outlook remains mixed Wolseley, with residential stabilising but commercial & industrial under further pressure. Cooke’s forecasts may trend up, he said, due to costs savings, but the broker’s sector preference continues to remain elsewhere. Panmure has a Sell on the stock: “Our current cautious stance is a “take profits call” after the strong run following the rights issue,” the broker said this morning, highlighting that good Travis Perkins results and a belief that markets are bottoming out have supported the shares since its cash call in April.
Shore Capital said that while the current stock valuation appears high at face value, it believes Wolseley’s operational gearing is very high and the prospect of economic recovery should result in strong earnings momentum going forward. “The company’s recent capital raising of around £1 billion and the exit from the loss-making Stock business has also significantly reduced financial risks,” the broker said as it reiterated its Buy stance.
