Bottom Line: Wolseley's skills rewarded

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The Independent Online
WOLSELEY has a lot to live up to. Even before yesterday's 18p jump to 692p its shares had outperformed the market by about 60 per cent over the past five years, a period that has included the worst slump in the building industry since the Second World War.

Just as well, then, that it has lost none of its talent for pleasant surprises. A 33 per cent rise in pre-tax profits to pounds 121.1m, a 28 per cent rise in earnings to 33.6p and a 6 per cent dividend increase to 12.55p for the year to July were ahead of even the most optimistic forecasts.

The advance was fuelled partly by acquistitions - Brossette, the French heating and plumbing distributor, chipped in about pounds 14m extra in its first full year, while the current year's purchases added pounds 3.7m. Purists might also exclude the pounds 5.5m currency gain and the pounds 3.8m of provisions used, but even that would leave underlying profits usefully ahead.

It would also give too little credit to Wolseley's acquisition skills. The performance from Brosette was better than most analysts had expected and is a testament to its skills in marketing and cost control. The increase in US operating profits from pounds 32.5m to pounds 47m confirms it as one of the few British building companies to be successful in the US.

That should quell lingering worries about Wolseley's preference for using shares to fund its acquisitions. The shares issued since the Brossette deal are roughly equivalent to a one-for-four rights issue, more modest than many others in the sector but with better results.

In the UK, distribution profits rose for the first time in two years even though the recovery was too fragile to have much of an impact on sales. Analysts estimate that it achieved a 7.8 per cent margin in the second half which, while lower than the peak of 8.5 per cent-plus, is still impressive.

The downside is that there is less room for improvement than at more recession-scarred rivals, but improved volumes through the lower cost base should ensure that profits keep forging ahead.

Analysts are expecting about pounds 160m, or 40p of earnings, in the current year, putting the shares on a prospective multiple of 17 times. That is a discount to the likes of Tarmac and Redland, where the recovery story has yet to be proved.

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