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Kingfisher: A solid start to the year

George Salmon | 24 May 2016 | A A A
Kingfisher: A solid start to the year

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Kingfisher Ordinary 15,5/7p

Sell: 324.40 | Buy: 324.50 | Change 7.70 (2.43%)
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Kingfisher, the company behind Screwfix, B&Q and the French DIY chain Castorama, have released a brief trading update for the first quarter of their financial year. The shares were up 2% in early trading. Total group sales were up 5.1% (+2.3% when measured at constant currency). Group like-for-like (LFL) sales increased by 3.6% at constant currency.

LFL sales at Screwfix surged 16.2%. 10 new Screwfix stores were opened, boosting overall sales growth to 23.5%. Meanwhile, closures at B&Q continued, with another 10 stores ceasing to trade in the period. This dragged B&Q's overall sales down 4.3% despite LFL increases of 3.6%. Kingfisher have now closed 40 out of the target of 65 stores.

In France, consumer-facing Castorama saw LFL sales were down 0.9% while trade-oriented Brico Depot LFL sales increased 1.5%.

Other international sales were up 6% (+5.8% LFL) with Poland the driver of growth. Weakness in the Russian rouble exacerbated an already weak result in that country.

To date, £78m of the three-year £600m capital return plan announced in the 2015/16 annual results has been returned to shareholders via share buybacks.

Veronique Laury, Chief Executive Officer, said the group have made a solid start to the year, trading in line with expectations. She also added that she is confident in the group's ability to deliver on the 'ONE Kingfisher' plan which has made progress against 'operational milestones'.

Our view:

What Kingfisher does internationally is rather similar. Yet only 22% of goods are bought by the group, the rest are bought by the individual chains. Even more surprising, 98% of the products sold across the group are only found in one format, in one country.

Clearly, the group could improve its buying clout, if it bought as much as possible on a group-wide basis, to go into stores across Europe. At this stage, Kingfisher sees scope to shed around half of its product range and to unify c.90% of core essentials as part of the 'One Kingfisher' plan.

Hopefully, this plan will raise group returns. So far this century, Kingfisher has rarely managed to make a double digit return on invested capital.

Ms Laury is not the first Kingfisher CEO to try and make the individual businesses play nicely together but there could be a lot to go for. Progress so far is in the stuff behind the scenes, like IT Systems and range planning, and not yet visible in store. By the end of 2016 it should be much clearer whether the ONE Kingfisher plan is going to deliver as planned.

Within the business, a clear split has emerged; between the trade-focussed Brico Depot and Screwfix (which is doing particularly well) and the struggling consumer-facing B&Q and Castorama chains. B&Q are closing stores and could see further pressure from a revamped Homebase, who have been taken over by the Australian company Wesfarmers. Wesfarmers have cornered the Aussie DIY market and have announced plans to invest £500m in Homebase to turn it around.

At present, Kingfisher trades on a prospective PE of circa 15.4x according to Bloomberg, versus a historic average of just under 14x. The forecast dividend yield of 3.0% (variable and not guaranteed) is unexceptional, but at least the balance sheet is a lot stronger now; back in the last decade, Kingfisher had net debts of a billion pounds or more.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.