Home Improvement Business In The U.K. - Kingfisher

| About: Kingfisher plc (KGFHF)

Summary

The number of residential property transactions in the UK peaked in March 2016 and will drive up the demand for building materials and other home improvement items.

Three big companies dominate the UK home improvement market. Kingfisher plc is the largest and has 43% of the UK market.

In 2016, Kingfisher plc started a transformation plan to increase profits by £500 million in five years.

At this point, Kingfisher plc is fully valued. The best entry point would be around £2.65/share.

UK Property Transactions Count published in March 2016 by the HM Revenue and Customs shows that the residential property transaction completions with value £40,000 or above peaked sharply in March 2016, and reached 161,990 compared with 91,490 in March 2015. This increase in sales in March might have been because of higher rates of Stamp Duty Land Tax (SDLT) on purchases of additional residential properties from 1 April 2016.

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Whatever the reasons for purchase, the newly bought properties frequently require additional works that would drive up the demand for the building materials and other home improvement items.

As in the US, the home improvement sales in the UK suffered after 2008 because of the severe economic conditions, higher unemployment, weak demand for construction, fall in residential property transactions and the delays of the improvement and renovation projects for the future. Now, the economic situation has improved, the unemployment dropped and the confidence for the better future has increased. Therefore, those temporarily deferred renovations and home improvement projects will be realized.

Research company IBISWorld forecast that industry home improvement revenue will increase at a compound annual rate of 2% over the five years through 2020-21. It is assumed that rising real income and consumer confidence will boost the sales of more expensive home improvement items.

According to IBISWorld, the UK home improvement market is dominated by three big companies, Kingfisher plc (OTCQX:KGFHF) (OTCQX:KGFHY), Homebase Limited and Travis Perkins Plc (OTC:TVPKF) (OTCQX:TPRKY), with a combined market share of 68% (see chart below). In this analysis, I would like to have a deeper look at Kingfisher plc.

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Kingfisher plc is the third largest home improvement company in the world, behind only US-based Lowe's Companies, Inc. (NYSE:LOW) and Home Depot, Inc. (NYSE:HD). The company operates 1156 stores in European countries. The majority of the shops are located in the UK and Ireland (787 stores under names B&Q and Screwfix), followed by France (220 stores under names Castorama and Brico Dépôt). Kingfisher plc also operates in Poland (79 stores), Spain (29 stores), Russia (21 stores), Germany, Romania, Turkey and Portugal. Kingfisher owns a significant property portfolio, most of which is used for business purposes. The value of property was £2.9 billion at year-end.

In the financial year 2015, Kingfisher plc reported sales of £10.441 billion, with a retail profit of £746 million. The major contributor to the results was businesses in the UK (sales £4,853 billion, retail profit £326 million), France (sales £ 3,786 billion, retail profit £311 million) and Poland (sales £987 million, retail profit £113 million). It should be noted that sales in the UK and Ireland were up 5.6% compared to the previous year, driven by a stronger UK economy and a more buoyant housing construction market.

In 2016, the company announced that it is starting the transformation plan. This five-year plan aims to deliver additional £500 million in annual profit over the current level. Optimization of operational efficiency is one of the three goals of the program. It also intends to return £600 million of capital to shareholders over the next three years in addition to the annual ordinary dividend.

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Stock performance

Analyzing the performance of the stock since May 2011, it should be noted that the stock price grew from 284.50p (or £2.845) on 16 May 2011 to 356.80p on 13 May 2016 at the compounded growth rate of 4.6%.

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Valuation

The current Price to Earnings ratio is 16.26, which is above the 5-year average of 13.1.

The stock's attractiveness is evaluated using a simple method. The estimates for three future years are taken and then multiplied by the P/E ratio for the stock that it is believed to be in the market for the particular stock in question. To simplify the calculations, the P/E ratios of the past five years are used: the minimum and the average of the past five years, and compared with the average for the industry. Only if the estimated stock price implies the 15% annual return, the stock is considered for investment.

According to the FactSet database, the estimated EPS for 2015-2018 is as follows (in £):

2015 2016 2017 2018
EPS estimate 0.22 0.23 0.24 0.29
EPS growth rate 4.5% 4.3% 20.8%
Stock price using min P/E of 5 years (9.2x) 2.1 2.2 2.7
Stock price using average P/E of 5 years (13.1x) 3.0 3.1 3.8
Implied annual return 2.4%
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EPS growth rate:

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Conclusion

According to my opinion and without the results of the newly announced transformation plan, Kingfisher plc will perform in line with the macroeconomic situation in the major markets (the UK, France and Poland). The five-year plan to deliver additional £500 million in annual profit is a good step forward, but as the program just started, the results are still to be seen.

As the valuation stands now, Kingfisher plc's share price is above the level required to fulfill the investment objective. The stock price needs to drop to a level of 265p (or £2.65) to be considered for investment.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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