Investment Column: Kingfisher's global scale makes it a buy

Impax Asset Management; Redhall
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The Independent Online

Our view: Buy

Share price: 279.3p (-2.8p)

The B&Q-owner Kingfisher enjoyed a sharp rise in profits in its first quarter, boosted by warm weather in its major markets, a later Easter and a glut of bank holidays in the UK.

However, the company, which has 860 stores in eight countries including France, Turkey and Poland, warned that it expects this year to be a "tough" one for retailers, especially in the UK, which accounts for nearly half of group profits.

For the quarter to the end of April, Kingfisher powered ahead, with retail profits higher by 19.1 per cent to £174m, on group sales up 3.3 per cent to £2.73bn. The star performer was France, which is not suffering from the same slowdown in consumer spending as the UK. Castorama, the group's French retail DIY chain, and Brico Depot, which targets trade professionals, grew retail profits by a heady 31.5 per cent to £77m.

This was driven by strong sales and a 90 basis points leap in gross margins – the difference between the price at which a retailer buys stock and the price it sells it for – as Kingfisher drilled into increased direct sourcing and better buying.

Leveraging such initiatives globally are an ongoing feature of Kingfisher's strategy under the leadership of Ian Cheshire, its chief executive since January 2008.

However, its UK gross margins dipped slightly in the quarter, as sales of lower margin seasonal products and promotional discounting offset similar direct sourcing benefits. That said, the home improvement market leader's prospects look rosy in the UK, given the collapse into administration of Focus DIY last month and B&Q's subsequent acquisition of 31 of its stores.

While Kingfisher's shares slipped back yesterday, they have been on a good run since August 2010 and now trade on 12 times forward earnings, a slight premium to the sector. However, we think that its global scale, which will provide it with partial shelter from any UK economic storms, and its efficiency programme justifies this rating. The shares are unlikely to surge in the next year, but we reckon that Kingfisher should provide steady gains and prove a good long-term bet.

Impax Asset Management

Our view: Buy

Share price: 65p (+1.25p)

Impax's confidence that an increasing number of investors will look to alternative energy certainly appears to be well-placed in light of yesterday's interim results.

They showed that revenues were up 56 per cent in year-on-year terms. Pre-tax profits came in at £2.05m, and would have been even higher if not for a one-off tax charge.

Chief executive Ian Simm said the recent nuclear issues in Japan, along with the unrest in the Middle East and North Africa, and China's new five-year plan, have all "significantly strengthened the prospects for investors in environmental markets".

Not surprising, then, that the company's assets under management increased by nearly a third, rising to £2.4bn by the end of April. All this should support the shares. Confirmation of further growth should send them higher still.


Our view: Sell

Share price: 63p (-6p)

The headline figures in Redhall's half-yearly results were not exactly cheery. Revenues in the six months to March stood at £64.3m, down from £65.4m in the first half of last year. Adjusted pre-tax profits at the engineering support services group came in at £1m, down from £3.3m.

Why? The main driver of was the termination of a major contract with Vivergo Fuels. That was negative. From an investment point of view, however, the more pertinent point is uncertainty caused by Redhall's continuing process to recover the costs of £14.6m from before the termination. Beyond that, there is the matter of the £1.2m that Redhall spent on settling claims from its former employees at the Vivergo site.

We fear that the legal process for recovering this money will create uncertainty around the stock. And if the market hates one thing one, it hates uncertainty.

To be fair, Redhall is cheap, trading at around seven times forward earnings, and no doubt it will work hard to put this episode behind it.

Indeed, ordinarily, we would not hesitate to buy in at the current levels. However, until we have some more clarity on the Vivergo issue, we'd rather keep away.