Shares in Wolseley (WOS) may have risen sharply in the fourth quarter of last year, but there is still a long way to go before the heating and plumbing products giant repairs the damage it suffered during the economic downturn. From a peak in 2006, the financial crash drove the shares down by an astonishing 90 per cent to a trough in early 2009.
- Solid growth in key US market
- Modest level of debt
- Bolt-on acquisitions
- Strict cost control
- Trading on mainland Europe still tough
- Currency headwinds
Happily, since then the shares have shown a steady recovery, and the group is now ideally poised to take advantage of an upturn in
activity in the US. The better tone here is crucial because Wolseley derives more than half its sales from the US and around three-quarters of group trading profits. Most of the income is generated from products in the repair, maintenance and improvement (RMI) market, and demand here is brisk. Growth in the new residential market remains more modest, though, while the commercial segment and a general increase in market share helped to push like-for-like revenue in the three months to the end of October up by 12.4 per cent. Three bolt-on acquisitions contributed an additional 3 per cent of revenue growth, and while continued investment in adopting new business models pushed up operating costs by 11 per cent, gross margins were still up for the 2014 financial year. After taking account of a £5m adverse currency movement, trading profits in the first quarter rose by 23 per cent to £174m. It's also worth noting that energy costs have been significantly lowered as a result of the recent downturn in commodity prices.
Trading in Europe remains a hard slog, with the eurozone seemingly incapable of throwing off the threat of recession. Like-for-like revenue in the first quarter fell by 9.3 per cent, and gross margins were down too. However, steps have been taken to counter the effects of the weak economy through a reduction in operating costs. Even so, first-quarter trading profits were more than halved to £6m; that includes a £1m loss because of euro weakness. This has dented sentiment, but it's worth pointing out that revenue from central Europe and France only accounted for 6 per cent of the first-quarter total, and some assets, including the wood solutions business in France, are now up for sale.
| WOLSELEY (WOS) | ||||
|---|---|---|---|---|
| ORD PRICE: | 3,696p | MARKET VALUE: | £9.61bn | |
| TOUCH: | 3,695-3,697p | 12M HIGH: | 3,729p | LOW: 2,966p |
| FWD DIVIDEND YIELD: | 3.0% | FWD PE RATIO: | 15 | |
| NET ASSET VALUE: | 1,110p | NET DEBT: | 30% | |
| Year to 31 Jul | Turnover (£bn) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p)** |
|---|---|---|---|---|
| 2012 | 13.4 | 628 | 167 | 60 |
| 2013 | 13.2 | 687 | 176 | 66 |
| 2014 | 13.1 | 725 | 196 | 82.5 |
| 2015* | 13.9 | 808 | 219 | 97 |
| 2016* | 14.6 | 898 | 244 | 110 |
| % change | +5 | +11 | +11 | +13 |
Normal market size: 500 Matched bargain trading Beta:1.20 *Numis forecasts, adjusted PTP and EPS figures **Excludes special dividend payments of 122p in 2013 and 110p in 2014. | ||||
Trading elsewhere is more or less treading water, but showing early signs of recovery. Like-for-like revenue in the UK, which makes up around 15 per cent of group revenue, grew by 0.5 per cent in the first quarter to October, while the acquisition last year of Fusion Provida, a supplier of utility infrastructure products, added a further 4.4 per cent to revenue growth. True, gross margins were down a little as a result of competitive pricing pressures, but operating costs were kept under control, and quarterly trading profits were just £1m down from a year earlier at £24m.
Around 15 per cent of group revenue comes from the Nordic region, where slower trading in Finland was offset by growth in Denmark and Sweden, leaving like-for-like revenue growth of just under 2 per cent. However, margins slipped in the wake of the acquisition of Finnish timber and materials group Puukeskus and, although trading profits in the quarter slipped by £3m, two-thirds of this was due to unfavourable currency movements. Canada provides just 6 per cent of total revenue, and sales there grew by 1.7 per cent, although trading profits were flat on constant exchange rates.
Group finances are in reasonable shape, and while net debt rose from £711m in July to £858m in October, this included buying back £120m of shares as part of a £250m share buyback programme announced in September last year. The group also has credit facilities of £2.2bn.
Despite the tough trading climate in Europe, Wolseley has still managed to show a consistent improvement in operational metrics. Return on capital employed has nearly doubled in the past five years to 30.7 per cent, while trading margins have improved from 3.4 per cent in 2010 to 5.8 per cent in 2014.
