What's new:
■ Proposed BSS acquisition expected to receive OFT approval
■ Cost synergies to boost profits
■ Enlarged group to take 20 per cent market share
Travis Perkins used to be an efficient, profitable but rather one-dimensional builders' merchant. Buying in 2004 changed all that, giving it significant exposure to more fickle consumer spending. That's reflected in its most recent trading statement; whereas turnover in the group's merchanting side was up 7.8 per cent in the first nine months of the financial year, revenue from Wickes was squeezed by the downturn, edging up just 2.1 per cent.
Its purchase of took Travis back onto more familiar ground, especially as the deal was struck at a favourable price. Cost synergies of around £25m a year can be expected, and while there remains some uncertainty over how well demand will hold up in the face of spending cutbacks, the merged business will leapfrog all its competitors to become the UK's leading plumbing and heating trade/retail business, controlling around 20 per cent of the market. The Office of Fair Trading (OFT) is expected to rubber-stamp the BSS acquisition shortly.
Shore Capital says...
Buy. The risk of public sector cuts has been well documented, and we estimate Travis Perkins has an exposure of around 10 per cent of sales. But the enlarged group will be grabbing a significantly larger slice of the market, and a sizeable chunk of sales are made in the more defensive markets such as repairs and maintenance rather than new construction. What's more, much of the spending on maintenance is non-discretionary, such as boilers and radiators. For 2011, we are forecasting adjusted pre-tax profits of £287m and EPS of 85.6p, rising to £317m and 94.3p in 2012.
Numis says...
Buy. BSS can boast the best growth profile in the merchanting sub-sector, while Travis Perkins has the second best. As well as the obvious attractions arising from this, putting the two together will give BSS greater exposure to repair and maintenance related plumbing and heating work, while giving increased scale to Travis Perkins' existing operations. In addition, Travis Perkins' management has a record of over-achieving on cost synergies, and the £25m projected annual cost savings by 2013 could be achieved a year early. Assuming there are no hitches to the acquisition, we are moving our share price target up to 1,050p.
