Investment Column: Forgive the mishap, Kingfisher can grow
Kier Group; Cenkos Securities
Friday 18 September 2009
Our view: Buy
Share price: 203p (-2.5p)
Last week's email mishap meant we got an early taster of Kingfisher's results (rough numbers were mistakenly sent to analysts). Yesterday the main course was served – and good eating it was too. The owner of the DIY chain B&Q posted a 34.6 per cent rise in adjusted pre-tax profits to £288m. Most of the company's main businesses have been doing well but it has also managed to keep tight control of costs.
The UK was its star territory, with a 66 per cent jump in retail profits as a warm May and June brought shoppers out at a time when the credit crunch meant competitors were falling by the wayside. B&Q appears to have to regained genuine momentum and also delivered a rise in gross margins of 100 basis points.
Kingfisher also delivered the goods in the important markets of France and Poland. The numbers weren't quite as stellar but they still generated better-than-expected rises in earnings. In Poland, profits were up 12.4 per cent, while the Castorama and Brico Depot chains in France posted retail profits 14.4 per cent higher after carving out savings of £33m from central costs and store operations. However, the troubled Chinese business remains a drag on Kingfisher's overall performance. B&Q China's underlying sales plummeted by 17.7 per cent and losses came in at a £22m over the half-year, although this represented a slight improvement on last year at constant currency rates.
But management said its turnaround strategy remained on track for B&Q China to break even in 2011, and it has already consolidated store numbers down from 63 to 48. While Kingfisher's shares are not cheap and trade on a forecast 2010 price-to-earnings ratio of 16.3, they have actually fallen back recently from their peak over the past year. The interim dividend was also maintained at 1.92p. Furthermore, Kingfisher has slashed its net debt by 26 per cent to £740m since the end of January. Given that trading in the second half is likely to be kinder in the UK and other markets, compared with last autumn, Kingfisher could have further upside. So we say Buy.
Our view: Hold
Share price: 1277p (+32p)
As an investor, you've got to be quick. Kier Group, the construction, housebuilding and contracting group, has seen its share price soar by more than 35 per cent over the past six months as investors realised that the sector was not about to be wiped off the map.
The problem for buyers is that the stock now looks expensive. The watchers at Panmure Gordon say: "The 2009 (and 2010) price-earnings ratio is 12.8 times, which is at premium to the contracting average of 10.2 times. The enterprise value to Ebitda is 7.3 times versus sector average of 5.7 times."
Some have argued that the premium was justified and would point to the 4.7 per cent yield. Investors should also be cheered by yesterday's full-year numbers. While they showed a 41 per cent drop in pre-tax profits, the Kier produced an improved margin and said its order book was filling up.
Still, we are disappointed that the dividend was not raised and we cannot agree with the chief executive John Dodds's suggestion that the maintained payout is an "expression of confidence", especially since he concedes that the board of directors had debated increasing the dividend.
If you agree with the analysis of Panmure Gordon, then investors have missed out on the bounding share price increases and now need a juicier dividend to remain on board. We are inclined to agree. Kier is making progress but, until it shows more, we say it is no better than a hold.
Our view: Buy
Share price: 192.55p (+32p)
The big question about Cenkos was how well the stockbroker would perform now that its charismatic founder, Andy Stewart, has taken a back seat.
It is a testament to the people he brought on board with him that the answer is "very nicely, thank you". Life has not been easy in the City but Cenkos has managed to post a 12 per cent rise in revenue to £21.2m and a 13 per cent increase in pre-tax profits at £6.2m. An impressive first-half dividend of 15p has been proposed, and the company has prudently taken steps to reduce its market risk so it can distribute more of its earnings.
Cenkos has also increased the number of clients it acts for, while raising more money for its customers than it did last year. It is always hard to get a handle on stockbroking firms (they tend not to analyse each other) but the numbers speak for themselves.
Cenkos is a firm on the march. Trouble is, the market woke up to it and marked up the shares strongly. Still, we think there's room for more. Buy.
As Voltaire once said, “Ice cream is exquisite. What a pity it isn’t illegal”
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