Investment Column: Wolseley must build on Irish foundation
Tuesday 12 January 2010
Our view: Hold
Share price: 1,426p (12p)
Yesterday was a big day for Wolseley, the building supplies company that includes the Plumb Centre chain in the UK. It is selling off its loss-making Irish business to private-investor backed WIBHM.
Wolseley Ireland Holdings Limited – which includes all branches of the Merchants, Brooks, Tubs and Tiles and Encon Ireland chains – will bring in €6.5m (£5.8m) in cash, plus €26.5m through a loan note with a coupon of 10 per cent to be paid back within one year. Wolseley has also agreed to fund the €5.5m pension deficit, to be repaid through a separate loan note, with a 3 per cent coupon, at a rate of €1.5m per annum from the end of the second year.
Ian Meakins, the Wolseley chief executive, is unsurprisingly upbeat. "I am confident that the transaction we have concluded with WIBHM represents a good outcome for Wolseley's shareholders," he said. "It will also enable us to bring an even greater degree of focus on driving performance improvement in our core UK businesses."
Analysts are less impressed. The recession has hit Wolseley hard, forcing a reorganisation of its shares and a whopping £1bn rights issue, last March, to take on its eye-watering £2.5bn debts. The newly weighted shares have traded within a fairly flat range since, with an estimated valuation to Ebitda ratio of 15.5 times based on calendar 2010 forecasts from Panmure Gordon. But the Irish sales could be just the beginning of a major restructuring.
Andy Brown, at Panmure, said: "The disposal of its Irish operations is in-line with its strategic focus. While the proceeds are not huge, it will remove a loss-making operation. While this should help sentiment, we continue to see better opportunities elsewhere in the sector."
We agree. Hold.
Our view: Buy
Share price: 70.5p (unchanged)
Investors in stockbroker Collins Stewart have endured a rough ride of late. The stock has shown some volatility, beginning 2009 close to the 60p per share mark, then rising to around 95p in early May before fluctuating widely through the months that followed. It slipped as low as 68.5p in December, and closed at 70.5p last night.
The wider market, on the other hand, has surprised with its resilience since March last year.
Part of the weakness in the Collins price is explained by the performance of the US business, which proved a drag on the half-yearly results last summer. The November interim management statement also evidenced a split between the US and other divisions – Collins said that while total revenues in the four months to the end of October were up 4 per cent on the year before, "overall revenues for businesses outside the US were significantly ahead of the same period in 2008".
In line with the equity market rally, the November update also spoke of a continuation of the momentum seen in the second quarter, however. This is a key point, we think, as brokers such as Collins Stewart are the obvious beneficiaries of the strength in the wider market. Given the risks to the rally – traders have been mumbling about the possibility of a correction for some months now – we would we be cautious about buying a stock like Collins this late in the day.
That said, the underperformance outlined above makes us pause for thought. Indeed, the fact that Collins trades on an undemanding multiple of 12.8 times Arden's forecast earnings for 2010 suggests that concerns about the US business or otherwise have been overdone. We say buy.
Our view: Buy
Share price: 12.25p (+3.75p)
Jacques Vert, the Aim-listed 25-store womenswear chain and concession business, added to the festive retail feelgood factor yesterday with a 2.1 per cent rise in sales for the 10 weeks since its half year, plus doubled pre-tax profits to £2.9m for the 26 weeks to 24 October. The retailer has helped itself by improving its ranges and extending to size 24 its Windsmoor daywear and formalwear offer. Another fillip was that Jacques Vert, which generated cash of £9.7m over the half year, said progress on gross margin continues to be "encouraging" and ahead of last year over the most recent 10 weeks.
Some 80 per cent of Jacques Vert's shares are held by seven investors. This is partly why its shares are cheap and trade on a forward 2010 price to earnings ratio of just five, compared to an average of 13 for the retail sector. Given its improved performance, we think Jacques Vert represents a bargain, despite liquidity issues and management's caution about the second half. Buy.
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