Wolseley profit tap springs leak

INVESTMENT COLUMN

It is a shame that Jeremy Lancaster, who has been crying wolf for as long as anyone can remember, looks like having his eternal pessimism proved right in his last year as chairman and managing director of Wolseley.

The Eeyore of the building materials sector, he regularly accompanies stunning profits growth with a warning that it cannot last.

This year, however, he was unequivocal - profits at the world's leading plumbers merchant will be no higher in the year to July 1996 than they were in the period just reported.

His gloomy prognosis, hardly a surprise at the end of what has been a pretty dismal reporting season for all the building groups, took the shine off otherwise impeccable figures. Profits jumped 21 per cent to pounds 245.4m, struck from a 16 per cent increase in sales to pounds 3.78bn. Earnings per share of 25.4p allowed a well-covered dividend of 9.8p, both figures 17 per cent higher than a year ago.

Looking ahead, the problems are across the board. At home, trading, which picked up before last Christmas, fell away sharply in the final quarter of the financial year. The French housing market failed to revive after the presidential elections, while growth in Austria slowed and competition increased since the country joined the European Union in January.

Similar trends emerged in the US, where Wolseley has built a sizeable chain of 368 plumbing and heating supply outlets and 76 lumber depots. After a strong first half, growth tailed off worryingly in the second six months.

That is the bad news. The good is that Wolseley enters what it believes is only a pause in growth in exceptional shape financially. Gearing of 13 per cent is inconsequential, which means it can continue to bolster flat underlying markets with growth through acquisitions. Cash flow is strong and return on capital employed an impressive 20.2 per cent.

On the basis of flat forecast profits this year of pounds 240m and pounds 266.5m in the 12 months to July 1997, the shares stand on a prospective price/earnings ratio for calendar 1996 of just over 12. That compares with a sector average of 11, a 10 per cent premium that is maintained in 1997 when Wolseley's rating of 11.1 times earnings compares with the building sector's 9.8 times.

That premium rating is probably justified given Wolseley's remarkable record over the years and after a 20 per cent share price decline since March 1994, the shares look safe enough. With three top directors due to retire at the same time next July, however, it would be surprising if the market didn't hold fire for a while. Unexciting.